Opening a business can be an exciting, surprising, complicated and expensive endeavor. It seems simple; you just make sure you are selling goods for more than you make them, right? Wrong. Without proper record keeping your prospering company can take a sudden and sharp dive toward bankruptcy.
Accounting is one of the most important tools for success in any business. It plays a role in every financial decision you make. From purchasing vehicles, equipment and supplies, to increasing production, selecting inventory quantity, and determining salary amounts, accounting is a critical component of any successful business. But if you lack any extensive background in accounting, where do you begin?
The first decision you must make is the type of accounting method you wish to use. Accounting methods determine how and when you record your expenses. The two main types of accounting methods are cash accounting and accrual accounting. Cash accounting is recommended for small businesses. It requires that you record the transactions when you have actually made or received the payments. Accrual accounting is usually the choice for large corporations. With this accounting method, you log in each transaction as it occurs, whether or not you have actually made or received the payments. You may choose to use a hybrid of the two accounting methods. For example, you may use accrual accounting to record revenue and cash accounting when recording bill payments. You must choose one of these accounting types the first time you file a tax return.
These terms include transactions, credits, debits, assets, liabilities, equity, revenue, cost of sales, expenses, cash flow, depreciation, accounts payable, accounts receivable, net profit/loss, overhead, and redeemable assets. If you are unsure as to the meaning of these terms, you can refer to Definitions of Accounting Terms included on the website.
You must know how to use a general ledger; this is where all accounts are maintained. Learning to use journals is also necessary. These are account ledgers where you initially record each of your account entries. The balance sheet is a record of your assets, liabilities and equity. The profit/loss statement records your revenue, cost of goods and expenses. These statements allow you to track cash flow to avoid losing money faster than you are making it. Negative cash flow is one of the main reasons for small business failure. Understanding how to use each of these tools will aid you in maintaining and organizing your accounts and will give you an immediate picture of your company's success.
There are a few basic accounting principles that must be remembered when maintaining, updating and balancing your accounts. A credit in one account always equals a debit in another. Also, remember that you must subtract the liabilities of your company from the asset value to determine the equity of you company. Revenue alone will not give you a clear picture of the worth of your company.
To ensure proper accounting in each part of your business, you should follow a simple procedure - keep or make a receipt of each transaction in your company. Have the accounting department analyze each transaction to determine the type of transaction, accounts involved and the resulting debit or credit to individual accounts. Record these transactions in the general journal so you can access the information in the future. Transfer, or post, the information to the appropriate accounts in the general ledger and then balance the amounts by adding or subtracting from each specific category and summing to make sure that the credits are equal to the debits. You should make any adjustments needed at the end of the period and close the account by taking the balance to zero and preparing a financial statement (balance sheet, income statements).
If you are new to accounting, the terms and principles can be very overwhelming; however, help is always available. Take some accounting courses to learn the proper methods of accounting - courses are available at most local community colleges. Purchase accounting software. It can guide your accounting procedures and ease the confusion of assigning credits and debits. Most software does this by prompting you to enter the amount and the payee and then automatically recording the entry in the two appropriate accounts. Some software even includes a "primer" that teaches you basic accounting principles.
So, if you're a small or startup business owner and a beginner accountant, remember to record each transaction as it occurs, make sure your entries are accurate and let accounting-based information guide each of your financial decisions - ensuring the financial security of your company.
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