Financial Management
Accounting for Founders: The Basics You Actually Need to Know
A practical introduction to accounting for founders who want to understand their own numbers. Covers double entry, the accounting equation, financial statements, and a worked example that ties it all together.
- #Accounting Basics
- #Double Entry
- #Financial Statements
- #Startup Finance
You started a company to build something, not to learn accounting. But at some point, someone hands you a balance sheet and expects you to understand it. Or your accountant says something about "accruals" and "provisions" and you nod while understanding nothing.
This guide covers the fundamentals. Not everything there is to know about accounting, just what you need to actually understand your own numbers.
What accounting is
Accounting is a translation layer. It converts the raw events of your business (buying materials, paying salaries, sending invoices) into structured financial information. That structure is what makes it possible to compare your business to others, report to tax authorities, and make informed decisions.
The rules for how to do this translation are called accounting standards. In the EU, most companies follow International Financial Reporting Standards (IFRS) or local adaptations of them. These standards exist so that "revenue" means the same thing in your books as it does in your competitor's.
Accounting is also broader than most people realize. There is backwards-looking accounting (financial reporting), forward-looking accounting (budgets and forecasts), and management accounting (figuring out what things actually cost). This guide focuses on the backwards-looking part: recording what happened and producing financial statements from it.
Bookkeeping vs accounting
Bookkeeping is the act of recording transactions. It is mostly data entry: taking an invoice, deciding which account it belongs in, and entering it into the system.
Accounting is the broader discipline that includes bookkeeping but also involves reviewing those records, making judgement calls about classification, and producing reports that accurately represent the state of the business.
As a founder, you will interact with both. Your bookkeeper (or your accounting software) handles the recording. Your accountant reviews the records and produces the statements you file.
Why your business needs proper accounts
The short answer: because you have to.
Tax authorities require you to calculate your taxable income each year. To do that, you need complete accounting records. If you want a bank loan, the bank will ask for financial statements. If you are raising a round, investors will want to see your numbers. If you are running a business with a team, you need financial information to make decisions about hiring, spending, and pricing.
Even if nobody asked, you would want this information. Knowing how much cash you have, what you owe, and whether you are actually making money is not optional.
Double entry: the one rule that holds everything together
Every accounting transaction has at least two sides. When something goes up, something else goes up or down to balance it out. After every transaction, the books add up to zero.
This is called double entry bookkeeping. It has been the foundation of all modern accounting since the 15th century, because it works: it catches errors, prevents fraud, and creates a complete record of how money flows through a business.
Here is an intuitive example. Your company sells a consulting service for EUR 1,000, and the client pays immediately by bank transfer.
Two things happened: you have EUR 1,000 more in your bank account, and you have earned EUR 1,000 in revenue. The transaction records both:
Increase Bank Account EUR 1,000
Increase Sales Revenue EUR 1,000
This looks like double counting. You only received EUR 1,000, but the two accounts show EUR 2,000 of movement. The accounting equation explains why this works.
The accounting equation
Every financial statement in the world follows this relationship:
Assets = Liabilities + Equity
Assets are what you own (cash, equipment, money owed to you by customers). Liabilities are what you owe (loans, unpaid supplier invoices, taxes due). Equity is what remains: the net worth of the business.
This equation always holds. Open the annual report of any company in any country and the balance sheet will balance. If you have EUR 50,000 in assets, you have exactly EUR 50,000 in liabilities plus equity. No exceptions.
This is what makes double entry work. Every transaction affects at least two accounts, but the equation stays in balance:
- You take out a loan: cash goes up (asset), loan goes up (liability). Balanced.
- You earn revenue: cash goes up (asset), equity goes up. Balanced.
- You pay an expense: cash goes down (asset), equity goes down. Balanced.
Debits and credits
Accountants do not say "increase" and "decrease." They say "debit" and "credit."
The confusing part is that a debit does not always mean increase. It depends on the account type:
| Account type | Debit | Credit |
|---|---|---|
| Assets | Increase | Decrease |
| Expenses | Increase | Decrease |
| Liabilities | Decrease | Increase |
| Equity | Decrease | Increase |
| Revenue | Decrease | Increase |
So the consulting example becomes:
DR Bank Account EUR 1,000
CR Sales Revenue EUR 1,000
DR means debit, CR means credit. In every transaction, total debits must equal total credits.
You will sometimes see this written with negative numbers instead. Credits are shown as negative:
Bank Account EUR 1,000
Sales Revenue -EUR 1,000
Both notations mean the same thing. The underlying logic is identical.
A worked example
Abstract rules become clear with a concrete example. Here are two companies transacting with each other, showing how everything connects end to end.
Setup. Company A manufactures widgets. It buys raw materials, pays employees to assemble them, and sells the finished products. Company B is a retailer that buys from Company A and resells to end customers. Both charge 21% VAT on sales.
Company A's transactions
Company A buys EUR 500 of raw materials plus EUR 105 VAT, on credit. Its employees spend 10 hours assembling 10 widgets at EUR 25/hour. It sells the 10 widgets to Company B for EUR 1,000 plus EUR 210 VAT, on credit. Company B pays in full. Company A then pays its raw materials supplier.
DR Raw Materials Inventory EUR 500
DR VAT Receivable EUR 105
CR Accounts Payable EUR 605
(Buying raw materials on credit)
DR Finished Goods Inventory EUR 250
CR Wages Payable EUR 250
(Recording 10 hours of assembly labour)
DR Finished Goods Inventory EUR 500
CR Raw Materials Inventory EUR 500
(Transferring materials into finished goods)
DR Accounts Receivable EUR 1,210
DR Cost of Goods Sold EUR 750
CR Sales Revenue EUR 1,000
CR VAT Payable EUR 210
CR Finished Goods Inventory EUR 750
(Selling widgets to Company B)
DR Bank Account EUR 1,210
CR Accounts Receivable EUR 1,210
(Collecting payment from Company B)
DR Accounts Payable EUR 605
CR Bank Account EUR 605
(Paying the raw materials supplier)
Company B's transactions
Company B buys 10 widgets from Company A for EUR 1,000 plus EUR 210 VAT, on credit. It sells them to end customers for EUR 120 each (EUR 1,200 total) plus EUR 252 VAT, for cash. Its employees work 5 hours at EUR 15/hour to handle the sales. It then pays Company A.
DR Inventory EUR 1,000
DR VAT Receivable EUR 210
CR Accounts Payable EUR 1,210
(Buying widgets from Company A)
DR Bank Account EUR 1,452
DR Cost of Goods Sold EUR 1,000
CR Sales Revenue EUR 1,200
CR Inventory EUR 1,000
CR VAT Payable EUR 252
(Selling widgets to customers for cash)
DR Wages Expense EUR 75
CR Wages Payable EUR 75
(Recording employee wages)
DR Accounts Payable EUR 1,210
CR Bank Account EUR 1,210
(Paying Company A)
The financial statements
After all of that, here is where each company stands.
Company A
Income Statement:
Sales Revenue EUR 1,000
Cost of Goods Sold -EUR 750
----------
Net Profit EUR 250
Balance Sheet:
Bank Account EUR 605
VAT Receivable EUR 105
----------
Total Assets EUR 710
Wages Payable EUR 250
VAT Payable EUR 210
----------
Total Liabilities EUR 460
Equity (Net Profit) EUR 250
----------
Total Liabilities + Equity EUR 710
Company B
Income Statement:
Sales Revenue EUR 1,200
Cost of Goods Sold -EUR 1,000
Wages Expense -EUR 75
----------
Net Profit EUR 125
Balance Sheet:
Bank Account EUR 242
VAT Receivable EUR 210
----------
Total Assets EUR 452
Wages Payable EUR 75
VAT Payable EUR 252
----------
Total Liabilities EUR 327
Equity (Net Profit) EUR 125
----------
Total Liabilities + Equity EUR 452
In both cases, total assets equal total liabilities plus equity. That is not a coincidence. It is the accounting equation at work.
What to notice
Cost of goods sold (COGS) represents what you spent to earn your revenue. Company B bought inventory for EUR 1,000 and sold it for EUR 1,200. The EUR 1,200 in revenue is offset by EUR 1,000 in cost, because you cannot take credit for the full amount when you already spent most of it to get there.
Company A's COGS includes EUR 250 of labour. Company B's does not. This is intentional: Company A manufactured the widgets, so the labour to assemble them is part of the product cost. Company B's employees sold the widgets, which is a selling expense, not a production cost. The distinction matters for how you report your margins.
Net profit is the incremental value the company added. Company A took EUR 500 of raw materials and EUR 250 of labour, then created EUR 1,000 of value. The EUR 250 difference is its contribution. Company B took EUR 1,000 of inventory and EUR 75 of sales labour, then created EUR 1,200 of value. Its contribution is EUR 125.
VAT flows through your business, not into your profit. Notice that VAT does not appear on the income statement. It shows up on the balance sheet as either a receivable (VAT you paid on purchases, which you can reclaim) or a payable (VAT you collected on sales, which you owe to the tax authority). VAT is not your money. You are collecting it on behalf of the government.
The three reports that matter
The example above produced two of the three core financial reports. Here is what each one tells you.
Income statement (also called profit and loss, or P&L): a summary of revenue and expenses over a period of time. It answers the question: did we make or lose money this quarter?
Income statements are additive. Four quarterly income statements added together equal the annual income statement.
Balance sheet: a snapshot of assets, liabilities, and equity at a specific date. It answers: what is the state of the company right now?
Balance sheets are not additive. If you have EUR 100,000 in cash on Monday and EUR 100,000 on Tuesday, you do not have EUR 200,000. Each snapshot stands on its own.
Cash flow statement: a summary of how cash moved over a period. It starts with the opening cash balance, shows what came in and what went out, and arrives at the closing balance. It answers: where did the cash go?
A company can be profitable on the income statement and still run out of cash, for example if customers pay slowly or if you are investing heavily in inventory. The cash flow statement catches this.
How accountants actually work
Understanding the process helps explain why your accounts are never "done" as fast as you expect.
Capture. This is where transactions get recorded. Historically this was manual data entry; increasingly it is automated through bank feeds, invoice scanning, and integrations. But even with automation, someone needs to decide which account each transaction belongs in. That classification decision is where most of the time goes. When you have 200 accounts with similar-sounding names ("office expenses" vs "office supplies"), it is slower than it looks.
Reporting. Once transactions are recorded, reports are generated by summing up account balances and formatting them. This is the mechanical part.
Review. This is the step most founders do not see. The accountant reviews the generated reports and asks: are the balances correctly categorized? Are there missing transactions? Do the bank balances in the system match the actual bank account? They compare this period to the prior period and look for anything unusual.
This step often sends the accountant back to the capture stage to fix mistakes, reclassify transactions, or record items that were missed. It is iterative. A balance sheet is not produced with a single click; it is refined through review.
Decisions. Once the reports are clean, they reach you. Now you can use them to answer real questions: can we afford to hire? Should we raise prices? Are we spending too much on a specific category?
This is the entire point. Everything before this step exists so that this step is possible.
The bottom line
Accounting is not complicated in principle. Money comes in, money goes out, and you record both sides of every transaction. The accounting equation always balances. Reports summarize the records into something useful.
The complexity comes from volume, edge cases, and the judgement calls that turn raw data into meaningful information. You do not need to handle that complexity yourself. But understanding the framework (double entry, the accounting equation, what the three main reports tell you) means you can read your own financials and ask the right questions.
That puts you ahead of most founders.
Want to see this in practice?
Financica handles the double entry for you. Record an invoice and the debits and credits are created automatically. Your income statement, balance sheet, and VAT returns are always current, built from the same underlying data.
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