As a small business owner, you must wear multiple hats daily, especially when first getting started. If accounting is one of those hats, and even if not, you should become familiar with the seven basic concepts below.
Accounting refers to the measurement, recording, and communication of all financial aspects within a business. Financial accounting will prove crucial to ensuring your small business’s success. The primary skill set needed in small business accounting is financial projecting, accounts payable and receivable, bookkeeping, cash-flow management, fiscal and expense reporting, tax filing, payroll, banking, and credit management.
You can ultimately set up your business for financial success by improving your business accounting knowledge. Accurate and consistent accounting for small business can help you understand your company’s economic power, make future market projections, and ease the stress of filing taxes.
The 2 Essential Accounting Types for Entrepreneurs
There are two standard accounting methods for small business owners. You’ll want to ensure that the selected process works for your company before the accrual of expenses and revenue begins. Once your approach is established, you’ll want to use the chosen methodology for tax and bookkeeping purposes consistently.
Accrual-Basis Accounting
You record revenue and expenses as incurred rather than during the currency exchange. It can provide you with a clearer picture of your business finances.
Cash-Basis Accounting
Cash basis accounting is relatively simple. Revenue is recorded when received, and your financial records recognize expenses when they are paid. It’s the most commonly used method among new business owners due to its straightforwardness.
Decide on Payment Terms
As a small business owner, you can hire an accountant, record transactions on your own, or use accounting technology to record your financial transactions. If you’re going the cheaper route at first, utilize a chart of accounts to compile statements, review progress and locate transactions. An accounting chart will make your life easier as a new entrepreneur, as long as they are consistently updated.
Depending on the type of small business you own, you may have to consider credit options for your customers. Instead of collecting payments immediately at purchase, you may choose to invoice them later. If so, you will additionally want to create an effective invoicing system to keep track of those transactions and to easily merge your records together for tax season.
Objectivity in Financial Documentation
Accounting data should be easily defined and verified, as well as free from the accountant’s personal bias. It’s important to remember that each transaction in your accounting records should have adequate supporting evidence.
Matching Expenses
It would be best if you were prepared to match the expenses incurred in an accounting period with the revenues recognized in that period. So, if income is recorded during a time period, the cost of the goods sold should also be charged at that time.
The purpose of matching is to let you see established relationships and patterns between income and purchases. Basically, it’s vital to record the costs associated with revenue in the same period as the income gain so you can track it effectively.
Consistency is Key
After choosing the accrual, financial recording, and payment methods that will work best for your small business, stick with it. It’s absolutely necessary as an accountant to maintain consistency across all accounting records and platforms, or risk potential legal trouble in the future.
An Equation for Successful Accounting
Here is a standard accounting equation for when you are recording business transactions:
Assets = liabilities + Owner’s equity
Assets, liabilities, and equity are the three portions of the accounting formula for small businesses. Below, we briefly explain each component and why they are essential to new entrepreneurs.
Assets
Assets are any resources your business owns and include non-physical investments and insurance. For your accounting to be accurate, your assets must consistently equal the amount of liability plus equity.
Liabilities
A liability includes anything that is an allegation against the company’s assets, such as payments or owed debts. Ultimately, penalties represent a negative value and are offset when recording. For instance, if your company secured a loan from a bank for $20,000, assets and liabilities would increase by the same amount.
Equity
Equity is the number of assets remaining after liabilities are subtracted. The nature of the accounting formula allows for elements to be moved around to solve for unknown variables. Consider that you don’t know your company’s equity but do know the liabilities and assets. You could subtract liabilities from assets to solve for x and determine the equity.
Separation of Personal and Business Finances
One of the most critical concepts for a small business owner is to avoid combining business with personal funds, accounts, and expenses. Business accounting records should reflect only business transactions; otherwise, you’re setting yourself up for confusion down the road. Yes, that even means charging personal expenses to your business credit card. Doing so will help you preserve your business’ legal integrity and maintain certain liability protections.
The Bottom Line
Whether your small business is just starting out or if you’re looking to improve company values and revenue, honing your accounting skills can assist in staying on track with your goals. An online course focused on entrepreneurship essentials is an excellent option for learning business success skills. Another way to take your company to the next level is to consider purchasing an accounting book like How Much Does it Cost to Make a Donut. In particular, this book will teach you about enhancing accounting knowledge to positively impact your small business and gain a competitive edge within the marketplace.
Keeping your small business financial records organized and accurate is vital, so don’t be afraid to seek professional help if you’re feeling lost. Staying on top of accounting can help maintain control over your organization’s financial health, offering you a sense of calm, knowing that your business is prepared for anything.
