Managing a small business entails learning. You need to know the ins and outs of your business, do market research, and more! But on top of these many tasks, you also need to familiarize yourself with accounting basics. Doing so will help you understand your business’s financial situation and make informed decisions that will affect your company’s future.
We’ll explain the most important things you need to know about small business accounting so that you can improve your business. If you have just opened your business, keep reading! You’ll find the details below helpful.
Accounting and Bookkeeping
The first thing you need to learn is the bookkeeping-accounting relationship. The two are inseparable, so they are often interchanged even when they fulfill different roles.
Bookkeeping is the process of monitoring and tracking all business income and finances in books. Meanwhile, accounting makes sense of all the gathered information through understandable reports.
Many small business owners try to self-learn bookkeeping and accounting. While it is possible, it is still best to seek assistance from experts who are already well-versed in the tasks, so you’ll know everything is done right.
Although you can delegate accounting and bookkeeping tasks to experts, it pays to know some of these terms so that you can understand data and reports easily.
- Cash basis and accrual accounting: Two basic accounting processes.
- Income and expenses: The money coming in and out of your business.
- Capital: The money used to begin a company.
- Assets and liabilities: Assets are any resource owned by a company while liabilities are costs and debts.
- Debit and credit: Debit records all the money coming into your account and credit is the amount that is deducted from your company assets.
- Income statement: A statement that shows the company’s income and expenses.
- Profit and loss and cash flow statement: A statement that shows whether your business is making or losing money.
- Financial statement: Reports that show the company’s financial status.
- Accounts payable and accounts receivable: Accounts payable records the money the company is supposed to pay to suppliers or creditors. Accounts receivable is the amount the company is yet to receive from customers as payment for goods and services.
- Balance sheet: A financial statement showing the company’s assets, liabilities, and equity.
- Cost of goods sold (COGS): The costs in producing a product or service.
- Net profit: The business earnings after deducting all costs and expenses.
- Revenue: Also known as “income,” or the total earnings of a company.
- Equity: The remaining company money after deducting all liabilities.
- Gross margin: The remaining money after deducting the COGS.
Benefits of Accounting
Every small business owner should begin their bookkeeping and accounting the moment they start their business. You can keep all your income and expenses tracked through bookkeeping, so every cent of your money is accounted for. Then, when you get regular financial reports, you can check if your business is on track with your financial goals or if it’s lagging.
If you are succeeding financially, you can take note of the best practices to continue them. The areas for improvement will also be easier to see. For instance, you can see where most of your expenses are coming from or how high your taxes are. As a result, you can find ways to lower them and enact profitable finance ideas.
Common Accounting Challenges
Aside from the benefits, it is also helpful to know the red flags of accounting. Knowing these will allow you to proactively work on avoiding them or be prepared with an action plan once you inevitably experience them.
One of the many challenges of accounting is data inaccuracy, or not getting income and expenses right. This situation is more likely to happen when you manually input data, as it’s prone to human error.
Data breaches and corruption:
Data stored on desktops without a backup are more prone to breaches and corrupted files, compared to cloud-based accounting.
Due dates, payment reminders, and tax deadlines—there are plenty of schedules to remember, which, when missed, can mean legal repercussions or more inaccurate data.
Knowing these myths early on will keep you away from incorrect accounting beliefs that can cause miscalculations and errors.
It is a myth that accounting is only needed during tax season, as doing so will keep you from getting regular updates about your business finances. Plus, it burdens your accountant because they have a whole year of finances to backtrack.
The belief that accounting doesn’t need humans is also a myth. Even the most advanced software needs experts to operate them. Software may project the numbers, but it is still an accounting team that brainstorms financial strategies and makes decisions at the end of the day.
Helpful Accounting Software
In this highly advanced age, there’s no reason not to use accounting software in place of spreadsheets. Here are the many advantages of using technology for your accounting:
- Records each transaction in real time
- Able to process cash basis and accrual accounting
- Automatically generates invoices
- Allows bank, credit cards, and other payments through integrations
- Tracks time and projects of your employees
- Integrates with various inventory, CRM, and eCommerce systems
- Generates reports quickly
- Equipped with role-based access for security
- Cloud-based accounting provides financial record protection
- Allows computer and mobile phone access
Some of the reliable accounting software you can try are QuickBooks, Xero, FreshBooks, and Sage.
Learn the Accounting Basics
So, there you have it—the basics of accounting that all new business owners should learn. Of course, this is just an overview, and there are plenty of other important things to learn as your business grows. But if you can get a handle on these concepts and principles, you’ll be well on your way to keeping your finances in check.
If you need any bookkeeping, eCommerce sales tax, and accounting help, know that you can always partner with experts. Professional teams have experience helping businesses grow and succeed, so don’t hesitate to reach out for help to get it right.
Mike Pignatelli, CPA, is the CEO of Unloop, 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.