> ## Documentation Index > Fetch the complete documentation index at: https://help.agatabo.com/llms.txt > Use this file to discover all available pages before exploring further. # Accounting Basics > Essential accounting concepts for non-accountants ## Overview You don't need to be an accountant to manage an organization, but understanding basic accounting principles helps you use Agatabo effectively and interpret financial reports correctly. ## The Accounting Equation **Everything in accounting revolves around this equation**: ``` ASSETS = LIABILITIES + EQUITY ``` **Assets**: What the organization **owns** **Liabilities**: What the organization **owes** **Equity**: What the members **own** (net worth) **Example**: * **Assets**: Cash in bank (5M), Loans to members (10M), Equipment (1M) = **16M total** * **Liabilities**: Member savings (12M), Reserves (2M) = **14M total** * **Equity**: Retained earnings (profit) = **2M** * Equation: 16M = 14M + 2M ✓ *** ## Double-Entry Accounting **Every transaction has two sides** - money comes from somewhere and goes somewhere. **Examples**: Member deposits 10,000 RWF: * **Debit** (increase) Cash: +10,000 * **Credit** (increase) Member Savings: +10,000 Member receives 50,000 RWF loan: * **Debit** (increase) Loan Receivable: +50,000 * **Credit** (decrease) Cash: -50,000 Member repays 50,000 RWF loan: * **Debit** (increase) Cash: +50,000 * **Credit** (decrease) Loan Receivable: -50,000 **Rule**: Total debits must always equal total credits. *** ## Debits and Credits Simplified **Forget what you learned about "debit card" meaning money out.** In accounting, debit/credit are technical terms: | Account Type | Debit = | Credit = | | ----------------------------------- | ---------- | ---------- | | **Assets** (cash, loans) | Increase ➕ | Decrease ➖ | | **Liabilities** (savings, reserves) | Decrease ➖ | Increase ➕ | | **Equity** (profit) | Decrease ➖ | Increase ➕ | | **Revenue** (interest income) | Decrease ➖ | Increase ➕ | | **Expenses** (salaries, rent) | Increase ➕ | Decrease ➖ | **Tip**: Focus on the **Balance** column in reports, not debit/credit. Agatabo handles the accounting rules automatically. *** ## Key Financial Statements ### Balance Sheet (Statement of Financial Position) **Shows**: What you own, what you owe, and members' equity **at a specific date** **Format**: ``` ASSETS Cash 5,000,000 Loans Receivable 10,000,000 Equipment 1,000,000 Total Assets 16,000,000 LIABILITIES Member Savings 12,000,000 Reserves 2,000,000 Total Liabilities 14,000,000 EQUITY Retained Earnings 2,000,000 Total Equity 2,000,000 Total Liabilities + Equity: 16,000,000 ``` **Use**: See financial health at a glance. Are assets growing? Is equity positive? *** ### Profit & Loss (Income Statement) **Shows**: Revenue earned minus expenses incurred **over a period** **Format**: ``` REVENUE Interest Income 2,000,000 Fee Income 300,000 Total Revenue 2,300,000 EXPENSES Operating Expenses 800,000 Salaries 500,000 Bank Charges 50,000 Total Expenses 1,350,000 NET INCOME (Profit) 950,000 ``` **Use**: See if organization is profitable. Track performance month-over-month. *** ## Cash vs Accrual Accounting **Cash Basis** (simpler): * Record income when cash received * Record expense when cash paid * Ignores timing of when earned/incurred **Accrual Basis** (more accurate): * Record income when earned (even if not yet received) * Record expense when incurred (even if not yet paid) * Matches revenue to related expenses **Agatabo**: Primarily uses **cash basis** for simplicity. When you record a deposit, it's based on actual cash received. **Exception**: Interest on loans may accrue over time (calculated but not yet received). *** ## Common Accounts ### Asset Accounts **Cash** (Bank Account): * Physical cash and bank balances * Used to pay expenses, disburse loans **Loans Receivable**: * Total outstanding principal members owe * Decreases as members repay **Interest Receivable** (if used): * Interest earned but not yet collected * Converts to cash when payment received ### Liability Accounts **Member Savings**: * Total deposits members have made * Money owed back to members * Your organization's primary liability **Reserves**: * Money set aside for emergencies, bad debts * Still owed to members (part of equity), but restricted ### Equity Accounts **Retained Earnings**: * Cumulative profit over organization's lifetime * Increases with profit, decreases with losses **Current Year Earnings**: * Profit/loss for current year only * Rolls into Retained Earnings at year-end ### Revenue Accounts **Interest Income**: * Interest charged on loans * Primary revenue source for most organizations **Fee Income**: * Processing fees, late fees, membership fees * Secondary revenue ### Expense Accounts **Operating Expenses**: * Rent, supplies, communications **Salaries**: * Pay for treasurer, accountant, manager **Bank Charges**: * Fees charged by bank for account maintenance **Bad Debt Expense**: * Loans written off as uncollectible *** ## Reconciliation **Reconciliation** = Comparing two sets of records to ensure they match. **Bank reconciliation**: * Compare Agatabo's cash account balance to bank statement * Identify differences (uncleared checks, bank fees) * Record any missing transactions * Goal: Agatabo balance matches bank balance (after adjustments) **Why reconcile?** * Catch bank errors * Identify missing transactions * Detect fraud or unauthorized charges * Ensure accurate financial reports **How often?** Monthly, as part of closing procedures. *** ## Depreciation (Not Used in Agatabo) **Depreciation** = Spreading asset cost over its useful life **Example**: Equipment costs 1,000,000 RWF, lasts 5 years * Annual depreciation: 1,000,000 ÷ 5 = 200,000/year * After 3 years, equipment "worth" 400,000 on books **Agatabo**: Does NOT automatically calculate depreciation. Fixed assets recorded at purchase price and remain at that value. **Implication**: Your balance sheet may overstate asset values over time (equipment wears out but stays at original cost). *** ## Key Metrics **Liquidity** (Can you pay obligations?): * Formula: Cash ÷ Member Savings * Target: >10% (have 10% of savings as cash buffer) **Profitability** (Are you making money?): * Formula: Net Income ÷ Total Revenue × 100 * Target: >20% profit margin **Portfolio Quality** (Are loans being repaid?): * Formula: Loans >30 days overdue ÷ Total loans * Target: Less than 10% PAR30 **Return on Assets** (How efficiently are you using assets?): * Formula: Net Income ÷ Total Assets × 100 * Target: >5% annually *** ## Common Accounting Terms | Term | Definition | | ------------------ | ----------------------------------------------------- | | **Journal Entry** | Record of a transaction (debits + credits) | | **Ledger** | Collection of all accounts (chart of accounts) | | **Closing Period** | Locking past period so transactions cannot be changed | | **Accrual** | Recognizing revenue/expense before cash changes hands | | **Write-off** | Removing uncollectible loan from books as loss | | **Provisions** | Money set aside for expected future losses | *** ## Learning More **For non-accountants**, focus on: 1. Reading Balance Sheet and P\&L statements 2. Understanding assets vs liabilities 3. Reconciling bank accounts monthly 4. Interpreting key metrics (liquidity, profitability) **Don't worry about**: * Complex journal entries (Agatabo automates these) * Debit/credit rules (Agatabo enforces automatically) * Tax accounting (unless required by law) **If your organization grows large** (>100 members or >50M assets), consider hiring a professional accountant for quarterly reviews. *** ## Need Help? Transaction examples Reading financial reports