Starting a new business is so exciting. Many plan for years to nurture an idea or obtain the training they need to offer a new skill. Still, one area of starting a business leaves many entrepreneurs feeling out of their depth, and that’s managing their accounting. There are a few accounting basics that a startup entrepreneur should know that we’re going to touch on today.
Core Elements
Let’s start with double-entry bookkeeping. The principle is based on a simple equation. The assets of your business equal your liabilities plus equity. Double-entry bookkeeping is not a new concept. It’s been around since the mercantile period in Europe. It helped rationalize commercial transactions and make trade more efficient. It still does that today.
The double entry system records everything as a debit or a credit. Debts in one account equate to credits in another. Meaning the sum of all debits must equal the sum of all credits. All businesses can classify transactions across seven accounts. They include assets, liabilities, equities, revenue, expenses, gains, and losses. A basic accounting practice is to keep track of changes in each account as a company operates. This standardizes the accounting process and improves the accuracy of financial statements.
Profit and Loss
Another key practice is keeping track of your profits and losses. Most entrepreneurs understand that they need a budget. A profit and loss statement helps you make sure you’re staying on track with that budget. An important step is to have an accurate plan for your expected expenses and your income. Keeping track of daily expenses is important, too; these transactions are recorded on a balance sheet.
Many new entrepreneurs confuse a balance sheet with a profit and loss statement. Although these two reports might share some of the same information, they aren’t the same. A balance sheet shows the report of assets and liabilities at a specific point in time. A profit and loss statement shows this information for a period of time. A profit and loss sheet is important to show the net income, whether your company is in the red or the black.
When to Ask For Help
As a business owner, you wear a lot of hats, and time can be your most precious asset. However, taking the time to learn basic accounting practices can make the difference between success and failure. Many resources are available to help you develop this skill set. You can read more about what business owners need to know about accounting here. Or, if you’re ready to dive deeper and sharpen your accounting skills in an accessible way, Cassmer’s book How Much Does It Cost To Make A Donut is a great place to start.
If you already have a basic understanding of accounting practices, but need to brush up on your skill set, we offer a fantastic online course that can teach you entrepreneurship essentials. No one will know your business better than you. Taking steps to enhance your knowledge of basic bookkeeping and accounting will significantly impact your business’s growth and help you be informed and knowledgeable enough to make key decisions moving forward.
