ACCOUNTING 101: the BASICS

When you start your own business, most owner's do not keep track of their accounting. I am sure you opened your business because you have a passion for the service you offer, or have a love for the product you sell, you didn't open your business to keep track of finances. Let's just say, the accounting portion of things, is not your priority. No matter what, the importance of keeping track of your accounting is vital to your business success. Let's go over some accounting basics to make this process simpler for you.

“No matter what, the importance of keeping track of your accounting is vital to your business success.”

The big question is, what can having your accounting set up for your business help you with? Start with the reduction in errors, more free time especially when you set up automated processes, and access to comprehensive financial reports at any moment from anywhere. But what is accounting exactly? A simple way of defining accounting is a process of recording, analyzing and interpreting your business's financial information. With this information, you the business owner, can make operational decisions based on facts and numbers. Let us go over some Accounting Documents you should know and should be reviewing for your business, some terms to know & their meaning and lastly some basics for setting up your accounting system.

ACCOUNTING DOCUMENTS

Even if you do not have an accounting background, if you have a business, you should know the basics of business accounting, even if someone else like a CPA or internal bookkeeper does this part for you. Let us start with important documents that should be reviewed on a monthly basis. These documents will help you analyze and make important decisions for your business. Will be going over each in more detail on other posts to expand on the explanation of each.

1. Income Statement or or also referred to as Profit & Loss Statement for P&L: This document will show you the profit or loss made in any given period. You will have the breakdown of all of your businesses income received and all expenses that went out. This document can be seen on a monthly period, quarterly or year to date.

2. Balance Sheet: In this document, you are able to analyze your business' financial standing. Bank balances, assets, and loans will all be listed under your balance sheet.

3. Cash Flow Statement: With this document, you will review your business financing, operating and any investing activities to show you how your money is being spent and received for the period.

4. Bank Reconciliation: When reconciling your accounts, you are comparing your book balance against your cash. This will assure that there are no outstanding unreconciled transactions that should or should not be there and any possible duplicates which do happen.

“Even if you do not have an accounting background, if you have a business, you should know the basics of business accounting, even if someone else like a CPA or internal bookkeeper does this part for you. ”

TERMS TO KNOW

Now that we have discussed some of the documents that as a business owner you should know about, let's go over some of the important terms that you should be aware of. With this you can feel confident when speaking to your accountant and understand with ease.

1. Chart of Accounts: The list of chart accounts will either be set up by your accountant or software that you use will already have a basic one for you to work with. This list can be added to as needed based on your specific business. The COA's are used to record your business's transactions into your general ledger. The general ledger is what feeds your Profit & Loss and your Balance Sheet so you review accurate reports.

2. Accounts Receivables & Accounts Payable: Accounts Receivables or also known as AR, are the payments owed to you by your customers. This may be for either services you offer, or products that you sell to your customers. Depending on your business, you may have terms with your customers where they do not pay you right away. Your AR report will show any pending income and also all income received so far for any given period. Accounts payable or also known as AP are any and all payments that your business owes to any vendors for either services or products that they supplied to your organization. How does AP and AR show on your reports? In your Balance Sheet AR is recorded as a current asset and AP is recorded as a current liability.

3. Debits and Credits: This is a part that confuses most people when using double entry accounting. Every transaction that you input will have a debit and a credit. Debits will either increase asset or expense accounts and decrease liability, revenue or equity accounts. Credits do the reverse, either increases a liability or equity account, or decreases an asset or expense account. When recording a transaction, every debit entry must have a corresponding credit entry for the same dollar amount, or vice-versa. If both ends do not match, something is wrong. See below breakdown of what will increase or decrease depending on the account.

4. Assets: An asset is a resource that has value, such as equipment, patents and properties which are some examples that a business owns or controls with the expectation that it will provide a future benefit. Assets increase a businesses value and are reported on a company's balance sheet.

5. Depreciation: This is the method used in order to allocate the cost of a tangible asset (ex. machinery) over its useful life and is used to account for declines or "depreciation" in value over time.

6. Equity: This is the referred to as undistributed profits of an owner’s interest in a company which depending on your business structure, can also be referred to as "stockholders equity" or "owner's equity." All liabilities must be deducted with the calculation being Equity = Assets - Liabilities.

7. Liabilities: In simple terms, liabilities is what a business owes. This can be bank loans, mortgage for a property the business owns and/or all unpaid bills.

8. Profit: Accounting profit which is also referred to as net income, which is what a business has earned after subtracting all deductions and expenses from total revenue. This is the money left over.

HOW TO SET UP YOUR ACCOUNTING

1. Create a chart of accounts: As mentioned before, depending on the software you choose, it will have a basic chart of accounts already set up. It is best to always set up your chart of accounts depending on your business structure and also your specific business depending on what you would like to see on your reports. Chart of accounts can be added as needed. But keep in mind, that the more chart of accounts you add, the longer the reports will be. It is best to keep your chart of accounts simple and keep them based on your taxes at end of year.

2. Determine accounting method: There are 2 main accounting methods, which is cash accounting which is recorded when actual cash is received or spent. The second is accrual accounting which records the transactions when it happens, even if cash has not been received or spent. For example, you may have a vendor that you purchased something from, but they gave you net 15 terms to pay it. Even though you have not spent the money, you still record it the day the transaction happened, not when the money left your bank account.

3. Set up beginning balances: If your business already had transactions prior to you setting up your accounting, there is no need to input each and every transaction. Input beginning balances accumulated up to that point to have a starting point moving forward. If your company has already done prior year taxes, your beginning balances will be based on your business tax return.

4. Begin entering transactions: As soon as you input 1 transaction, you will already see that on your reports. With this you can start reviewing your company's financials.

Now that you have learned more about important accounting documents, terms that you should know and some basics to keep in mind when setting up your accounting. Keep an eye our for our future posts related to accounting and our upcoming courses for more in depth training.

As always, sending positive vibes your way 🙏

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