Get your green visor and calculators out because it’s accounting time. Learning accounting basics can help you understand what an accountant is working on or how to understand financial reports.
- A summary of accounting basics
- Important financial reports for your business
- Things to keep in mind when working with your finances
Single-entry vs. double-entry accounting
There are two common types of accounting entry systems for your revenue and transactions. Single-entry accounting creates a single ledger or sheet that has every single transaction in a single file. This is a great way to keep track of your transactions when you’re first starting out, but as your company grows and your expenses become more complicated, a double-entry system might be in your best interest.
A double-entry system uses different sheets for different types of transactions. However, if done correctly, all of the debits and credits on the sheets should balance out with one another. It’s a complicated system, but most accounting and bookkeeping software will default to a double-entry system. This system is commonly preferred because it is easier to find mistakes and helps give you a clearer picture of your business’ health by keeping different types of expenses separate.
Whatever system you are using, make sure that you’re consistently managing your accounting. A week or two of ignoring entries might not seem like a big deal, but this work can pile up quickly.
Cash vs. accrual method
There are two schools of thought when it comes to when to recognize a credit or debit in your accounting system. The cash system relies on the cash being in-hand to enter the money into the system. The accrual method recognizes revenue and expenses when the transaction is made. It requires more attention than the cash system. Ask an accounting professional which system is best for you.
Common financial reports
A balance sheet summarizes your assets, liabilities, and equity at any point in time. This report will tell you if you have money in reserve or if you need to put more in savings.
Profit and loss (P&L) statement
This report summarizes your revenue and expenses over a set time period, like six months or a year. The P&L statement helps you compare your business’ performance month-over-month and predict how you should be performing.
Cash flow statement
Cash flow statements help you understand how your business is generating revenue and its expenses. These reports will let you know if you can pay your bills and payroll or maybe what to do if you cannot.
Things to keep in mind
Get professional help
Great accounting help can keep you from paying too much in taxes or not having enough money for emergencies. Seek out help in your area, even for basic accounting advice.
Keep your receipts
Your business structure will determine what your tax requirements are but also what types of things you can deduct. Keep track of your business expenses and keep your receipts. These can save you a lot of money in the long run. Vehicle-related expenses, some meals, some travel, and even part of your personal phone bill can be deducted. Consult your tax consultant for information on what you can deduct.
Preparing for a rainy day might be hard when your company is just starting out, but understand that creating a savings account for your business could prevent your business from failing. Always having a little extra cash on hand isn’t a bad idea.
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Starting your own business feels like you have to become an expert in everything right away. It can be overwhelming. But, learning basics and knowing where to get help can go a long way for you and your business.