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December 05, 2022

What is Accounting and Why it Matters For Your Business

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Accounting may seem like something other than the most fun part of the business. However, accounting is indispensable. Without clear financial records, you can lose a lot of profit. You can also receive fines for late submission of financial reports to regulatory authorities. Profits, sales, expenses, taxes, invoices. So many things that a small business needs to control all the time!

In our article, we describe what business accounting is and explain its importance. We have also collected the top tips on how to track your business finances.

What is business accounting?

In general understanding, business accounting is the systematic collection, analysis, and reporting of financial transactions for a company. It also includes documenting these transactions for tax and regulatory authorities.

The main tasks solved by management accounting are:

  • analyzing and controlling expenses by segments, subdivisions, and products
  • calculating cost
  • planning expenditures for the reporting period
  • analysis and plotting the results of the company’s activities

Management accounting solves several significant problems, including making the right decisions in the company’s development, control, planning, and debt accounting.

One person or a team can maintain bookkeeping. As a rule, small business owners either keep business records themselves or hire a professional accountant. However, in most cases, the owners of small businesses keep records and deal with the financial side themselves.

Why is business accounting important?

Business accounting is an essential part of any company’s performance. With the help of bookkeeping, you can avoid the following:

  • Chaos in your finances
  • Untimely paid taxes
  • Not understanding whether your business is profitable
  • An imbalance in the ratio of your expenses and income

Bookkeeping clarifies where you make and lose money and what makes the most money. The structure of income and expenses helps determine how to act further. Besides keeping you conscious about your company’s past and present performance, small business accounting also aims to generate invoices and complete payroll. It helps to avoid many mistakes and makes entrepreneurs’ lives easier.

No More Bookkeeping Stress

Keeping proper financial records is time-intensive and small mistakes can be costly. BooksTime makes sure your numbers are 100% accurate so you can focus on growing your business.

Software that meets business needs

To see your financial situation, you should start recording everything – when you make sales, accept a customer invoice or pay a bill, etc.

There are several ways to register your financial transactions. You can make entries in notebooks and notes on the phone. However, using this type of accounting, it’s most likely to lose a part of the transactions. When the costs of the unknown “Other” reach 20-30%, you cannot understand how to optimize finances.

Many small businesses use a spreadsheet (Google Sheets or Microsoft Excel). Google Sheets is the leader in financial accounting and planning entrepreneurs` solutions. At the same time, it is easy to get confused: formulas fly by, and documents multiply.

If the formulas fly off or there is a trivial error, the numbers no longer add up. The situation is familiar to many: you need to get specific data quickly and do not even know where to look. The purchase and costs of raw materials are in one Google table, sales are in another, and employee salaries are in a notebook. Adding all expenses and profits in such a situation isn’t effortless.

If you use several tools or tables that do not integrate, there is a risk of data loss. Then preparation of a report or thorough analysis becomes impossible.

Another variant is special accounting software. Its cost ranges from nothing to hundred dollars per month. Small businesses choose their software depending on their needs. Alternatively, you can pay an accountant or bookkeeping firm to manage your accounts.

Basic terms

You may start by studying theory if you still need to figure out the difference between a debit and a credit and can’t distinguish an asset from a liability. It is not as difficult as it seems at first.

You should learn the basic financial concepts that underpin the financial system. Income, business profit, its types, and balance are the main terms that entrepreneurs should be familiar with and be able to operate during accounting.

We prepared a list of primary business accounting terms:

  • Accounts payable is money you owe to creditors and suppliers.
  • Accounts receivable are money customers owe for any purchase of goods or services they have made.
  • Assets are anything your company owns.
  • A balance sheet is a financial document showing your company’s financial position at the end of a specific period.
  • Liabilities are debts or financial obligations owed to the company, such as accounts payable, income taxes, wages, loans, etc.
  • A profit and loss statement is a document that contains information about profits, expenses, and net profit for a certain period.

Even if you are using the services of a professional bookkeeper, you should understand the basic financial concepts that underpin the financial system to control the finances.

What is Accounting and Why it Matters For Your Business

Keep the balance

Balancing is the basis of bookkeeping. The totals should match when you add debits and credits to an account.

For example, if your cash account had $3,000 in debits and $5,000 in credits during the month, you should adjust your cash balance by $2,000.

So you will have an adjusted trial balance. When you combine account types, the adjusted ratios must follow the accounting equation:

Assets = Liabilities + Equity

If both sides of the equation don’t match, you’ll need to return to the records to find the errors. Post the corrected journal and ledger entries, then repeat the process until the accounts balance. Then you are ready to prepare financial statements.

Tips on how to control business accounting

An entrepreneur should understand how and why to manage business finances and pay attention to accounting and management records. So you will be able to see the flow of money and analyze its business feasibility.

So, where to start financial accounting? Let’s take a look.

Separate personal funds and business money

Newbies often inextricably associate themselves with their businesses. For example, an entrepreneur can have a business account and several personal cards. Customers pay in different ways, and some also pay in cash. Then, a businessman buys groceries or fills up the car with this money. And at the end of the month, they have a complete mess in finances.

It’s better to separate personal funds and business money. A business bank account protects your assets in case of bankruptcy, lawsuits, or audits.

To avoid taking too much from the business account, set a fixed salary at the market level and refer it to the general wage fund – a regular expense item.

Opening a checking and savings account will help you organize cash flow and plan expenses.

Record all business transactions in one place

With this approach, you’ll not forget where you spent the money at any time. In addition, there is a risk of getting confused in many records, missing important transactions, or duplicating them. Also, when entering data, use categories and subcategories to mark operations. For example, divide all expenses in the office into “Rent” and “Stationery,” etc. So you can see which channel is more profitable or unprofitable for the business. Also, you’ll see the “Other” column and the percentage of expenses, which are difficult to track.

Set up a payment calendar

Production needs to purchase raw materials to continue producing goods constantly. It is also necessary to pay contractors’ work and premises rent. The day will come when several mandatory payments coincide, and the money will not appear in the account. You will have to choose between the necessary costs.

If you keep a payment calendar, you see a plan of mandatory expenses. Your goal is to avoid multiple payments on the same day and to have the necessary amounts available at the right time.

Review your accounting regularly

Be sure to tackle accounts when your mind is fresh and active.

Check your financial records at least once a week. And also, make it a priority to balance your accounts regularly. Better to do it monthly, quarterly and yearly.

Conclusion

With a little bit of preparation, even novices are able to take on bookkeeping or accounting tasks. Many accounting tools are available to take advantage of, whether you choose simple apps or expensive professional software.

Small businesses should keep the financial report to do more effective company management. Even if, at first glance, the industry works and brings sales, this does not mean everything is set up correctly. With the help of accounting, you can learn more about real numbers, structure debts, and map out business development.

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Author: Charles Lutwidge

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