All businesses use accounting in their financial system. Using a simple check and balance can do wonders on any business, be it sole proprietorship or a corporation. There are many accounting professionals that you can hire to do the work for you especially when tax season comes.
Doing your own accounting for your business can be great. Aside from keeping track of your expenses and savings, you have control over everything in your business. Imagine the time and money you can save by keeping your files and accounts in order.
If you aren't sure about hiring an accountant or if you think it's unnecessary since you still have a small operation going, you can use simple accounting for your business. What accounting does is give you useful information about where the finances are going within the business. Accounting helps you make better decisions in handling your operations.
The downside is accounting has its own alien language, which is why you need to learn a few of them to be able to understand the accounting process. Modern accounting uses the double-entry book keeping system. This system means that for every amount or goods received (debit), something of equal value is also parted with (credit). All debits and credits should be balanced at the end. This makes it easier to check for errors in the accounting books.
To start a simple accounting of your business, you have to keep a book. This is called bookkeeping in accounting terms. It means you have to make a record of all your business transactions whether buying something for the shop, paying bills or selling appliances from the your store. Some use a ledger or a record book for this purpose.
Now that you've got your "book", its time to learn about the three basic elements for accounting:
1. Assets - these are things of value owned by your business. Examples are cash (from sales), accounts receivables, inventory, land, building, equipment and uncollectible accounts.
2. Liabilities - these are debts of your business to other people, businesses or financial institutions like banks or lending companies. The system recognizes these accounts with words followed by "payable" like accounts payable and loans payable. This also includes taxes and insurance payments.
3. Owner's Equity - this is the amount the business owner is entitled to receive of whatever is left of the assets after the liabilities have been taken. It is sometimes called net assets.
All three elements form the accounting equation:
Assets = Liabilities + Owner's equity
And since the equation must always be balanced, in the end of the books the amount of the assets should be equal to the owner's equity. If you cannot balance it, you must have missed something or your business assets are being funneled to the wrong account.
If this accounting work sounds too tedious for you, you can buy softwares that can do the record keeping of your business. Some offer the full accounting service in their programs, from trial balances to printing financial statements. However, you still have to manually type in the accounts on your computer. If you do have a basic knowledge of accounting, your program can still give you the wrong information.
Accounting is a necessary tool for any business. The more you understand about how it works, the better it can help you improve your business. |
