Two of the smartest things you can do as a business owner are to (a) invest in accounting software and (b) get the help an accounting professional from day one. Both of these steps will help you keep organized books and make smarter financial decisions. But engaging an accountant and using software won’t necessarily make accounting foolproof, or guarantee the accuracy of your financials. The truth is, at the end of the day you’re responsible for your finances as a business owner—something that should ultimately be empowering.
That said, when it comes to accounting what you don’t know can hurt you. In part one of our two-part series on Small Business Accounting 101, we got the help of Dan Steiner, CEO and founder of Steiner Business Solutions, to compile some helpful accounting 101 terms, tips, and valuable lessons every business owner should know.
Business Accounting 101: Glossary
First, let’s look at the basic components of any business’s finances. Even if you have accounting software and an accountant, it’s good to have a grasp of the basics because, ultimately, you’re the one responsible for their accuracy.
- Balance Sheet: This depicts your company’s net worth by showing a side-by-side of your assets (what you have) and your liabilities (what you owe, and the owner’s equity).
- Assets: These include all of the cash and property held by the business that add to net worth.
- Current assets: Inventory, cash (deposits, short-term investments, petty cash), accounts receivable (money owed to the company), and marketable securities like stocks and bonds.
- Noncurrent assets: Property like trademarks, copyrights and patents, and tangible property like real estate, machinery, and office equipment.
- Liabilities: These include all debts and obligations that detract from net worth.
- Long-term liabilities: Loans and mortgages
- Short-term liabilities: Bills, credit card bills, accounts payable (money owed by the company)
- Owner’s Equity: When the assets exceed the liabilities, what’s leftover is the owner equity, which can comprise capital and retained revenue.
- Income Statements (or Profit and Loss Statements): This document tells you if your business is making or losing money. It can be broken down by different time periods depending on what information you’re looking to glean from it, and typically includes:
- Revenue from the sale of goods or services, or capital. Note: Revenue doesn’t necessarily mean you were paid yet, it just records that the services or goods were provided. Revenue is not the same as a receipt, although they can be recorded same if you’re paid on the spot.
- Expenses, including losses and operating expenses—money you need to spend in order to produce the revenue mentioned above. Similar to revenue, expenses don’t need to be paid out yet to be reported, e.g. employee compensation.
- Cash Flow Statement: This report is especially important because it can give you a snapshot of your company (what’s going out and coming in at any given time) to help keep you “solvent,” which means your assets exceed your liabilities and you’re able to pay your debts. Projecting cash flow for the future can help you make better decisions, whether it’s making cuts or seeking extra capital to make ends meet.
- Cash Accounting vs. Accrual Accounting
- Cash Accounting: Report expenses and income (credit card receipts, checks, and cash) only when they come in—not before. It’s all about payments into and out of your business.
- Accrual Accounting: Accrual accounting is all about earning, not payments, so does not depend on cash exchanging hands to be recorded. Items are recorded when income is earned and expenses are incurred. If you bill a client for work you’ve done in January but aren’t paid until March, that income is recorded for the month of January.
- Bank Reconciliations: Your bank account won’t always be the most accurate representation of your cash flow. If you’ve recently sent out a large check, spending based on what’s in your account before that check is deposited could quickly put you in the red. That’s what a bank reconciliation seeks to help prevent. This process compares your books with your bank account side by side so you can get a better picture of your cash position. Because there are transactions that will only show up in your books—say, outstanding invoices from vendors—and transactions like fees and interest earned that will only show up in your bank account, this process adjusts both accounts so they match up. You’ll adjust your books’ balance and your bank balance, then compare the two. If the amounts don’t reconcile, look for errors—something a bookkeeper or accountant can help you locate.
These are just a few helpful terms to know when approaching your business’s finances. Stay tuned for part 2, where we tackle some important accounting 101 lessons.
VISIT THE SOURCE ARTICLE
Author: Carey Wodehouse