You are no stranger to the excitement of beginning a small business. Still, there is a list of to-dos and the worry of needing to get things done correctly. The feeling gets worse when you think of finances. Nevertheless, a quick antidote to this is being equipped with the right knowledge.
Let us help you skip the worry by being well-versed in accounting basics. Although these details are not in-depth, they are a great starting point. Here are the nine basic things to know about business accounting.
Importance of Accounting
The first thing you should know about business accounting is its purpose. Starting accounting as soon as you begin your business means you won’t need to backtrack later on; backtracking your data is prone to inaccuracies. Accounting allows you to gather financial information about your business and run reports regularly. As a result, you’ll get a view of your financial health and create objective game plans from them.
You also need funding options for your business, and preparing your accounts will help you during investor presentations. And, of course, with responsible accounting, you will be ready for tax time. Knowing these benefits will push you to begin managing your finances from the beginning.
Although it is an accountant’s responsibility to know accounting principles by heart, a business owner should also have an idea about them. Knowing these nine principles can help you hold your partner accountant and bookkeeper accountable.
- Regularity or providing accounting definitions all companies and accountants follow.
- Sincerity to provide honest and accurate reports.
- Permanence, or creating and maintaining a consistent way of recording and reporting data.
- Non-compensation, or providing truthful reports with both good and bad performance included.
- Consistency in data gathering and reporting to easily compare across departments and companies.
- Continuity in record keeping despite any changes.
- Prudence in keeping data and analysis about financial records objective and accurate—not based on subjective opinions and speculations.
- Materiality, or that which drives accountants to record and report everything in detail.
- Periodicity, or reporting in particular and specific periods—monthly, quarterly, and annually.
- Good Faith, or the promise that all parties involved in accounting—the accountant, the business owner, and any third parties—should be honest in all transactions.
Although you’ll have an accountant do all your accounting tasks, it is still your responsibility to check the books, numbers, and reports. You need to make it a part of your daily tasks to check data for any inaccuracies and address them immediately. Knowing basic accounting jargon will help you understand what you’re looking at easily.
- Cash Basis Accounting: An accounting method that records income and expenses as they happen, (i.e., money that hasn’t reached or left your account yet won’t be recorded.)
- Accrual Accounting: An accounting method that records income and expenses that have yet to be paid or spent, (i.e., money that has been debited or credited will reflect in your statement.)
- Financial Statements: Includes income profit and loss, and cash flow statements.
- Balance Sheet: What you’ll look at to see your business’s total assets, liabilities, and shareholder’s equity.
- Income and Expenses: Income is the money coming into your business, while expenses are the costs or money spent on your business.
- Debit and Credit: Debits and credits are the money expected to come into and out of your accounts, respectively.
- Accounts Receivable and Accounts Payable: The money that people owe you and what you owe to suppliers, respectively.
- Assets and Liabilities: Whatever your company owns are all counted as assets, while liabilities are the short and long-term money your company owes.
- Cost of Goods Sold (COGS): The amount spent on manufacturing products.
- Profit or Revenue: Revenue is the money received from selling goods and services, while profit is the result of all expenses being deducted from revenue.
- Loss: The decrease in income.
- Gross Margin: The number of sales after deducting COGS.
All these terms are what you’ll see in the books. Some come as categories, and others result in the relationship between categories. You can run financial reports from these details weekly, monthly, quarterly, and annually.
A wise move to be truly prepared in accounting is not only to aim for excellence but also to foresee any challenges. When you know the situations that can hinder your successful accounting, you can proactively prevent them from happening.
Challenge of Lost Documents
Accounting involves collecting hard and soft copy documents from all financial transactions. Collected data is prone to lose or corruption, but with Optical Character Recognition (OCR) technology, the issues of data acquisition, storage, and protection are addressed.
OCR is a feature that turns photos of documents and receipts into text that is then stored safely in the cloud. These documents can also be uploaded to your books.
Still, you should always have hard copies on hand. So after storing your documents online, file them neatly in filing cabinets in case you get audited later on.
Sales, income, and corporate taxes are just some of the taxes you’ll have to know as a business owner. Sales taxes are applied on specified goods you sell. Income taxes are what you’ll compute, collect, and remit on your employees’ behalf. And, of course, you are obliged to pay corporate taxes for your business yearly.
Computation accuracy and paying on time are challenges you might encounter. The help of a professional bookkeeper and accountant can help you compute, collect, and remit the proper taxes.
In this modern time, one of the requirements for every accountant is software knowledge. Your accountant should know how to operate QuickBooks Online, Xero, Freshbooks, and Sage50 Cloud. The know-how will allow them to utilize these accounting software features for your business:
- Cloud-Based Data Storage for Security
- Cash and Accrual Accounting
- Use of Various Payment Gateways
- Automatic Invoicing and “Pay” Button Availability
- Bank Reconciliation
- Inventory Management
- Generation of Various Reports
- Time and Project Tracking
- Security and Role-Based Access
- Accessibility on Desktop and Mobile Devices
The use of software may look mundane, but it is an efficient way to protect your business from a data breach, document corruption, and content inaccuracy.
Accountant Qualifications and Responsibilities
There are various ways you can have an accountant handle your business finances. You can always hire an in-house accountant, which is beneficial because they’ll be familiar with your business operations. You can outsource to freelancers or accounting and bookkeeping business agencies, which allows you to save costs on office resources and monthly salaries.
Whichever option you choose, check if your accountant has these qualifications to fulfill their various tasks effectively.
- Certifications (e.g., Certified Public Accountant)
- Well-versed in using different accounting software
- Can handle bookkeeping in the absence of a bookkeeper
- Can partner and work with a bookkeeper when there is one available
- Responsible for generating timely and accurate financial reports and analyses
- Able to come up with suggestions and game plans to guide you in decision making
- Prepares tax documents for tax season
- Stays updated about the latest accounting and taxation laws
- Is trustworthy when it comes to confidentiality in financial data
Aside from technical skills, find an accountant with soft skills—one that can work in a team, has good customer service skills, shows leadership capabilities, and has great problem-solving abilities.
Excellent Accounting Starts Now
New business owners like you have a lot on your plate—but accounting doesn’t have to be one of the stressful parts. By taking some time to understand the basics of accounting, you can set your business up for success right from the start. We hope these accounting basics help you begin excellent financial management for your business.
Author – Mike Pignatelli, CPA, is the CEO of Unloop Accounting, an agency built to meet the accounting needs of modern eCommerce businesses. As an experienced financial controller, Mike has worked with various seven-figure inventory businesses. Mike and his team are your go-to accountants if you need reliable data to make sound financial decisions.