Starting a business may mean that you’ve got a lot of new responsibilities. One of the most important is business accounting. But what exactly is accounting? What value does it provide your business? And how much time is it going to require?
The good news is that with the right people, tools, and resources, accounting doesn’t have to be a black hole for your time. With a little bit of planning and effort, you can make accounting your friend. Besides, it’s a valuable part of your business operations.
What is Accounting?
Think of accounting like a big machine that takes in all your business’s financial information – records of transactions, taxes, projections, and more. This machine then tells you a story about the financial state of your business.Accounting is vital for understanding your business’s finances and making informed decisions about the future.
Accounting is a way to get a clear picture of your financial position. It can tell you whether or not you’re making a profit, what your cash flow is, what the current value of your company’s assets and liabilities is, and which parts of your business are actually making money.
You may only need to use an accountant when it’s time to file your taxes, which is something that certified public accountants (CPAs) can help with. In order to become a CPA, they need to pass an exam that tests their accounting knowledge and skills.
For businesses, oversight agencies like tax collectors and regulators want to see well-kept accounting records. If your business ever seeks investors or other shareholders, these agencies will review your accounting paperwork.
Accounting is all about recording business transactions. That means putting any activity or event that involves your company’s money into your company’s ledger. Recording business transactions is part of bookkeeping, and it’s a vital part of running a successful business.
The first step is to analyze and record all of the transactions that have taken place. This means gathering any invoices, bank or credit statements, and receipts from business transactions. Once you have all of this information, you can begin to categorize the expenses and income.
Then it’s time to take those documents and start making journal entries for your transactions. Journal entries include three components of a transaction: when it happened, what it was for, and how much it was.
Some businesses use single-entry accounting where only the expense or revenue is entered. But more common is double-entry accounting, which records each transaction in two accounts: where money is coming from and where it’s going.
An unadjusted trial balance is a listing of all your business’s accounts and their balances at the end of a reporting period. To prepare one, simply list out all your accounts and figure out their balances.
At the end of every period, it’s a good idea to go through and update any entries that might need to be changed. This is called preparing and adjusting entries. An adjusted trial balance is kind of like the ingredients list for a recipe. You need it to be complete and accurate before you can start cooking up your financial statements.
All of the information you’ve collected is converted into your financial statements. This includes summarizing all of your financial information into succinct reports for easy review.
Importance of Accounting
Before setting out on any journey, it’s essential to have some sort of roadmap. The same goes for when you’re planning your company’s growth. You need to set goals in order to have something to strive towards.
What do you want your profits to look like in the next year? And how about in five years? By setting these goals, you give yourself a better chance of reaching them. Keeping up with your accounting is essential to understanding your business finances.
This information helps you assess how quickly your business is growing and make future decisions accordingly. Without accurate reporting, you won’t have the full financial picture and could make dangerous decisions for your business.
Keep an eye on your financial statements! They can tell you a lot about how your business is doing. For example, if your costs of goods sold are increasing, that means that it’s costing you more money to produce each item.
And if your margins are getting thinner, that means that you’re not making as much profit on each sale. Growth goals are important, too. Make sure that they’re reasonable, and don’t be afraid to adjust them if necessary. Without financial statements, it’s tough to know where you stand.
Tracking Debts and Earnings
If a customer owes you money, you can see it in the Accounts Receivable (AR) section of your balance sheet. This is generated automatically by accounting software, or you can do it manually. The balance sheet tells you how much AR you’ve received during the month and how much is still outstanding.
By looking at your balance sheet, you can keep an eye on how well you’re collecting payments. If you see that you’re falling behind, you can put new processes in place – like stricter payment deadlines or better follow-up with clients – to make sure you get the money you’re owed when you need it.
Having a variety of debts can feel very overwhelming, but luckily, the balance sheet consolidates everything. Not only does it show everything you owe in one place, but it also includes all of your bank account balances.
This way, you can easily see what you have available to pay off your debts. Reviewing your balance sheet regularly is a great way to make sure that you’re on top of your payments and cash flow.
Regardless of whether you plan to seek investors or sell your business in the near future, it’s always a good idea to keep your options open. The best way to do that is to have a reliable accounting system set up now.
If you do decide to court investors or sell at some point down the road, you’ll already have accounting records vetted by a CPA (Certified Public Accountant) that show your business is profitable and has potential for growth.
There are a few key reasons why business accounting is so important. As a business owner, it’s helpful to understand the types of assets, inventory and liabilities your business has. This information can help you continue to grow your business and secure investors.