JoshA basic understanding of major accounting principles can help business professionals track and evaluate their business’s financial information.
This knowledge lets entrepreneurs recognize the different types of financial records they need to maintain to fulfill their legal and financial obligations. It also helps them identify what kind of accounting methods to use to conduct their day-to-day business activities.
A preliminary understanding of core concepts can lead to better and more profitable decisions for a company. This firm grasp on accounting may help some business people recognize the value of employing professional accountants to manage their finances.
Even though small business accounting is relatively easier than other accounting types, it can still be complicated, especially for people with inadequate financial knowledge.
Are you looking to brush up on some accounting basics to propel your business in the right direction? Look no further because it’s all down here!
1. Recording Profit and Loss
Even amateurs know that keeping proper track of your business’ profits and losses is crucial to its smooth running. For instance, your company operates on an ongoing basis. In that case, if the losses outweigh the gains, you can make a few adjustments in your advertising or sales approach to get things back in the groove.
A profit and loss statement is a staple in the accounting pantry. It is one of the essential accounting tools that businesses use to summarize their income and expenses over a fiscal period. You’ll need the following components to create a P & L statement:
- Total revenue/sales.
- Operating expenses.
- Merchandise inventory.
- Cost of goods sold (COGS).
- Other expenses and incomes
- Gross Profit
2. Selecting An Accounting Method
Accountants have to decide what kind of accounting job suits them best, e.g., the financial accounting vs managerial accounting debate. Similarly, an entrepreneur needs to choose between the two basic accounting methods. Most small businesses use cash-basis accounting, where you recognize income or expenses after receiving or paying the due amount in cash. Accrual-basis accounting is the second choice in which you record expenses and income as soon as the transaction occurs instead of waiting for the payments or receipts. The accrual method requires recording and tracking of payables and receivables.
3. Understand Expenses
Profit and loss statements also go by the name of income statements. And to produce accurate income statements, you first need to develop an idea of your monthly expenses. Some entrepreneurs don’t know the exact amount of their spending or their contribution to the business, which could be problematic.
If you’re running an advertising campaign and spending on promotional events, you should ask your customers for feedback. Analyze the number of new customers you’re converting through these events and consider the amount of return on investment. If you want to secure the solvency of your business, you must track your expenses. Whether it’s negligible office stationery expenses or extravagant client lunches, they will impact your business’s overall cash flow.
4. Importance Of Cash Flows
Cash inflows and outflows are yet two indispensable tools in the accounting realm. Cash flow statements are glimpses of total cash coming and going out of a business in a specific period. You can prepare these statements by calculating the sum of cash collected and dispensed on investments, financing, and operations. Regardless of your business’s profitability in the present, you can land in hot waters if you don’t have the cash to pay your debts or afford your purchases.
Comparing previous cash-flows with forecasted income and expenditures allows estimation of the amount of money that will flow through the business in the future. Plus, you can review annual and monthly cash-flow statements to detect income patterns and predict future trends.
5. Observing Accounts Receivable
Though being up to speed with your account payables is essential, your company’s survival depends more on its accounts receivables. How will you continue operations if there’s no money coming into the business? To remain on top of things, try reviewing your total outstanding revenue every month.
Typically, if only 10% of your accounts receivable are past their due date, you shouldn’t worry. Get in touch with clients having overdue payments. Be considerate with your receivable collections as you’re going to need these clients in the future. But don’t allow them to exploit you either.
6. Employing Accounting Software
There was a time when accounting software was unaffordable for many young entrepreneurs. Fast forward to the present; you can now access this software for an incredibly small or no fee at all. Accounting software can be a child’s play for most seasoned accountants. Yet, they provide business people with various ingenious services ranging from budgeting, taxes, inventory management, financial statements, and payroll liabilities.
Besides providing accurate bookkeeping, tracking your finances, and automating accounting processes, accounting software can integrate with several other business software. This integration allows cross-application data sharing and saves your valuable time.
6. Break-Even Analysis
Suppose your business has a total monthly expenditure of $35,000. In that circumstance, you must generate at least $35,000 or more in revenues to break even and start earning a profit. The break-even point refers to the production level at which the total costs equal the total revenues of production. Break-even analysis is simple to do, yet businesses neglect its significance.
In most cases, figuring out your business’s break-even point is the precursor to earning higher profits. For example, suppose you couldn’t reach your break-even point in February. In that case, you can direct your energies into reducing expenses or aggressive marketing in the following month. Once you know where that financial sweet spot lies, you can make wiser choices about your profits.
7. Meeting Tax Deadlines
Though taxes vary with the region you operate in, you’ll probably have to pay sales tax. For instance, you run a supermarket. Your walk-in customers will have to pay a percentage of your product’s selling price in sales tax. However, if international clients ask you to export your goods, you don’t have to include sales tax for export orders.
You only have to pay taxes once a year as an individual citizen. But, as a business entity, you’ll have to file tax returns or payments with the IRS. There are two kinds of taxes demanding quarterly payments. The first is the self-employment tax, which comprises Medicare taxes and Social Security taxes. Income tax on your business earnings is the other culprit.
Is there anything worse than getting in trouble with the IRS? The answer is most likely no. Remember that crimes such as tax evasion count as serious offenses. You can face severe repercussions if you import foreign products without paying the correct taxes.
A Brief Account
The basic accounting concepts and terms aren’t just financial mumbo jumbo, and you shouldn’t dismiss them as only your accountant’s headache. They are beneficial business tools that lead to better financial decision-making and future income projections, evading financial errors that cause small businesses’ downfall. Understanding these concepts can enhance your knowledge and promote your business’s steady growth.