As a small business owner, understanding basic accounting should be at the top of your to-do list even if you have a bookkeeper or accountant that takes care of all the stuff.
Basic accounting is simply recording all your business’s financial transaction…
putting it all together into your financial statements like your income statement and balance sheet,
so you and others can study them and make sound business decisions from them.
5 Tips in Understanding Basic Accounting…
Keep your personal finances separate!
Just because that card you are using for your small business earns you 1% cash back on every purchase … doesn’t mean you can use it for your personal purchases so you can get more cash back rewards:-)
See more information on keeping personal…personal in thisAccounting 101 article.
Decide if you are going to operate on a cash or accrual basis.
Most small businesses that don’t have to track inventory use a cash basis. See this page on the difference between cash and accrual basis accounting.
Start recording EVERYTHING financial on a regular basis.
Most small business owners use some kind of accounting software which does all the basics such as debits and credits in the background, but if you have no idea what an accounting equation is or just want to brush up on the basics…read this article on Basic Accounting Concepts.
Know what the “Accounting Cycle” is.
The accounting cycle is the process every financial business transaction in your small business should go through.
First, the transaction happens…you make a sale or pay a bill.
Secondly, that transaction is recorded in a journal (see this article on posting accounting journal entries) then the transaction is posted to the account it is impacting in your accounting ledger.
After trial balances, worksheets, and adjusting journal entries, all your transactions for a specified time period are gathered together in financial statements (we will discuss more about financial statements in a late issue).
If you have double entry accounting software many of the above steps happen in a slit second when you post that check you wrote for advertising for example.
However, understanding basic accounting will help you know why your office furniture purchase is not on your Profit/Loss (Income) Statement but on your Balance Sheet…why your accountant is telling you your debt to assets ratio is too big…etc.
Make a profit!
As small business owners understanding basic accounting concepts such as determining your break-even point and cost management can be a very handy tool.
Determining your break-even point is essential in figuring out how much to charge for your product or service or even where you might be able to even cut some costs.
Cost management is all about learning how to use different accounting methods to determine the cost of producing your product and then how to use that information to make a profit.