08/21/2024 | News release | Distributed by Public on 08/21/2024 10:01
Learn about accounting basics how developing an understanding of your business's accounting will allow you to grow better.
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Have you ever started a business or thought about launching one? If so, you've probably realized that finances are among the most critical aspects of your business plan. In my opinion, understanding how to manage your money effectively can make the difference between success and failure. That's where "Accounting 101" comes in.
Whether you're just getting started or looking to strengthen your financial knowledge, mastering the basics of accounting is essential for making informed decisions, keeping your business on track, and ultimately achieving your goals.
I wrote this basic accounting guide to ease you into the world of financial management. By the end, you'll feel ready to tackle your own business's accounting - or at least navigate the fundamentals with confidence.
Keep reading, or use the chapter links below to jump to the section you're looking for.
Table of Contents
If you're an aspiring entrepreneur, running a small business, or just want to learn accounting basics in general, here's an overview. It starts with this conceptual understanding: accounting is to financial management what a foundation is to a building.
Accounting helps you keep track of three important things:
The idea behind grasping accounting principles is to become better equipped at budgeting wisely, forecasting future financial needs, and maintaining the overall health of your business.
To explain accounting basics, I'll start by giving a glossary of essential terms. Then, I'll dive into definitions, types of accounting, and basic accounting principles. I will also discuss the basic accounting tasks that small business owners need to take care of, and skills that are valuable in the field.
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Whether you're doing the accounting yourself or working with an external party, these phrases will come up. Talking the talk will help you make better choices for your business. These 15 terms will create the foundation on which you'll build your knowledge.
Some of these terms might not apply to your business right now. However, you'll need a holistic understanding of the subject as your business grows.
Not to be confused with your personal debit and credit cards, debits and credits are foundational accounting terms to know. I remember the difference between the two as follows.
A debit is a record of the money expected to come into my account, while a credit is a record of all money expected to go out of my account. Essentially, debits and credits track where the money in your business is coming from and where it's going.
Many businesses operate out of a cash account - or a business bank account that holds liquid assets for the business.
When a company pays for an expense out of pocket, the cash account is credited because money is moving from the account to cover the expense. This means the expense is debited because the funds credited from the cash account are covering the cost of that expense.
Here's a simple visual to help you understand the difference between debits and credits:
Debits |
Credits |
Increase assets |
Decrease assets |
Decrease liabilities |
Increase liabilities |
Decrease revenue |
Increase revenue |
Increase the balance of expense accounts |
Decrease the balance of expense accounts |
Decrease the balance of equity accounts |
Increase the balance of equity accounts |
Accounts receivable is money that people owe you for goods and services. It's considered an asset on your balance sheet. For example, if a customer fulfills their invoice, my company's accounts receivable amount is reduced because less money is now owed.
Accounts payable is money that I owe other people and is considered a liability on my balance sheet. For example, let's say my company pays $5,000 in rent each month. Here's how that would be recorded in the financial records before that amount is paid out.
Date |
Account |
Debit |
Credit |
7/31/24 |
Rent |
5000 |
|
7/31/24 |
Accounts Payable |
5000 |
Once that value is paid, here's how that would be recorded in your company's financial records.
Date |
Account |
Debit |
Credit |
8/1/24 |
Accounts Payable |
5000 |
|
8/1/24 |
Cash Account |
5000 |
Accruals are credits and debts that I've recorded but not yet fulfilled. These could be sales completed but not yet collected payment on or expenses made but not yet paid for.
(Why not wait to record the activity until the payment is complete? I'll answer this question later when I explain the accrual accounting method.)
Assets are everything that your company owns - tangible and intangible. My assets could include cash, tools, property, copyrights, patents, and trademarks.
A balance sheet is a key financial statement that shows where my company stands in terms of assets, liabilities, and owners' equity at a specific point in time. When I look at my balance sheet, I see a clear picture of what my business owns (assets), what it owes (liabilities), and the net value left over for the owners (equity).
Burn rate is how quickly the business spends money. It's a critical component when calculating and managing cash flow.
To calculate burn rate, I simply pick a time period (such as a quarter or a year). Then, I subtract the on-hand cash amount at the end of that period from the on-hand cash at the beginning. Lastly, I divide that number by the number of months in the period. Remember, you can choose your own cadence (which you can then use for dividing).
Capital refers to the money I have to invest or spend on growing my business. Commonly referred to as "working capital," capital refers to funds that can be accessed (like cash in the bank) and don't include assets or liabilities.
Cash flow refers to the balance of cash that comes into and goes out of my business during a specific period. I keep track of this on a cash flow statement, which helps me see how well my company is managing its cash.
For example, if my business receives $10,000 from sales in a month but spends $8,000 on expenses like rent, salaries, and supplies, my cash flow for that month would show a positive balance of $2,000. Monitoring cash flow is crucial because it lets me know if I have enough cash on hand to cover my obligations and invest in future growth.
The chart of accounts is something that can be used as a master list of all the accounts in my organization's general ledger. It's like a roadmap that helps me organize and categorize every financial transaction, making it easier to track and manage the company's finances.
The COA includes five main types of accounts: assets, equity, expenses, liabilities, and revenues. If I need to record a purchase of office supplies, I would look to the COA to find the appropriate expense account where this transaction should be logged. This system keeps everything in order and ensures that all financial activities are properly documented.
The cost of goods sold (COGS) or cost of sales (COS) is the cost of producing the product or delivering the service.
COGS or COS is the first expense you'll see on your profit and loss (P&L) statement and is a critical component when calculating your business's gross margin. In my opinion, reducing your COGS is the best way to increase your profit. This way you can stay net positive even if your sales aren't increasing.
Depreciation refers to the decrease in assets' values over time. It's important for tax purposes, as larger assets that impact the business's ability to make money can be written off based on their depreciation. (I'll discuss expenses and tax write-offs later on.)
Diversification is a risk-management strategy that helps avoid putting all my financial eggs in one basket. By spreading my investments across different industries or asset classes, I can reduce the risk of losing a significant portion of my capital if one area underperforms.
For example, instead of investing solely in tech stocks, I might diversify by also investing in real estate, bonds, and healthcare stocks. This way, if the tech sector experiences a downturn, the impact on my overall portfolio is minimized because my investments are spread across different areas.
Equity refers to the amount of money invested in a business by its owners. It's also known as "owner's equity" and can include things of non-monetary value, such as time, energy, and other resources. (Ever heard of "sweat equity"?)
I like to remember equity as the difference between my business's assets (what I own) and liabilities (what I owe).
A business with healthy (positive) equity is attractive to potential investors, lenders, and buyers. Investors and analysts also look at your business's EBITDA, which stands for earnings before interest, taxes, depreciation, and amortization.
Expenses include any purchases you make or money you spend in an effort to generate revenue. Expenses are also referred to as "the cost of doing business."
There are four main types of expenses, although some expenses fall into more than one category.
A fiscal year is the time period a company uses for accounting. The start and end dates of your fiscal year are determined by your company; some coincide with the calendar year, while others vary based on when accountants can prepare financial statements.
Your gross margin (or gross income) is your total sales minus your COGS - this number indicates your business's sustainability.
An income statement, also referred to as a profit and loss statement, is a financial document I use to see how much my business has earned and spent during a specific accounting period. It shows me the total revenue my company brought in, subtracts all the expenses incurred, and helps me determine whether I made a profit or a loss during that time.
For example, if my business earned $50,000 in revenue over a quarter but had $30,000 in expenses, my income statement would show a net profit of $20,000. This document is essential for understanding my company's financial performance and making decisions about future operations.
Inventory refers to the assets my company holds with the intention of selling them through our operations. This includes not only the finished goods ready for sale but also items currently being produced and the raw materials or components used in the production process. Essentially, inventory encompasses everything from the materials we start with to the final products we aim to sell to customers.
Liabilities are everything that your company owes in the long or short term. Your liabilities could include a credit card balance, payroll, taxes, or a loan.
In accounting terms, profit - or the "bottom line" - is the difference between the income, COGS, and expenses (including operating, interest, and depreciation expenses).
You (or your business) are taxed on your net profit, so I believe it's important to plan for your tax liability proactively. Do this by staying on top of your net profit amount, setting aside some of your revenue in a separate savings account, or paying your estimated taxes every quarter (like employer withholding).
Return on investment, or ROI, is a metric used to measure the profitability of an investment, usually expressed as a percentage. To calculate ROI, divide the net profit from the investment by its initial cost and then multiply the result by 100 to get a percentage.
Your revenue is the total amount of money collected in exchange for goods or services before any expenses are taken out.
A trial balance is a report used to check the balances of all the accounts in my general ledger at a specific point in time. I usually prepare a trial balance at the end of a reporting period to make sure that everything adds up correctly before finalizing my financial statements.
For example, if I've recorded various transactions throughout the month, I'll generate a trial balance to see if the total debits match the total credits. If they do, it confirms that my accounts are balanced. If not, I know I need to investigate and correct any discrepancies before moving forward.
Variable costs are expenses that fluctuate based on the amount of goods my business produces or sells. Let's assume I'm running a manufacturing company and decide to double my production - my costs for materials and labor would increase accordingly. These are variable costs because they rise and fall with the level of production.
For example, if I produce 1,000 units of a product and the cost of raw materials is $5,000, producing 2,000 units might raise that cost to $10,000. This change in expense directly ties to the increase in production, making it a variable cost.
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I like to think of accounting as the backbone of any successful business, providing the essential data and insights needed to drive informed decision-making.
It's not just about crunching numbers; it's about understanding the story behind those numbers and how they impact the organization's overall health and direction. Through careful analysis and reporting, accounting turns raw financial data into actionable intelligence, guiding everything from day-to-day operations to long-term strategic planning.
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Business owners use accounting to track their financial operations, meet legal obligations, and make strong business decisions. In essence, business accounting is the foundation for sound financial management and long-term business success.
Accountants oversee the financial records of a business and make sure the data is correct. Then, they use this data to create budgets, financial documents, and reports. They can make sure the money coming into the business works with the expenses required to operate.
Beyond that, they ensure compliance with the regulatory side of finances.
Accountants review cash flow statements for operations or an income statement for an upcoming board meeting. Part of the accountants' job description is also to attend meetings to offer advice on the company's finances. Other common activities include:
Accounting is more than staring at balance sheets all day. There are many different types of accounting that require different skill sets. Your business may need to work with a certain specialty based on their needs. Below, I'll discuss some common forms of accounting you might encounter.
Tax accounting involves maintaining and keeping track of your business' taxes. This can include filing yearly taxes, tracking spending and tax rates, as well as assisting employees with setting up tax forms.
For doing this type of accounting, I recommend having a solid understanding of how to file taxes and of your tax code. You'll need to comply with both federal regulations and the states in which you operate your business.
Financial accounting focuses on the value of the company's assets and liabilities. These accountants make sure that a company's accounting follows the Generally Accepted Accounting Principles, which I will describe below. These accountants also work with cash flow statements and balance sheets.
Management accountants present financial data to stakeholders and senior leadership at a company. They play a greater role in reviewing what products or services a company needs, as well as how these efforts can be financed.
If forensics brings up images of NCIS crime scenes, your deductive skills are up to par! Forensic accounting does require a certain degree of digging and detective work.
This type of accountant investigates and analyzes financial information for businesses. I consider forensic accountants as always being on the lookout for compliance breaches or illegal activity. Someone who uses his knowledge to audit organizations for financial misconduct.
Cost accountants create a constant record of all costs incurred by the business. This data is used to track where the company spends and improve the management of these expenses. Cost accountants are responsible for finding redundancies and places where the company could cut costs.
Auditors are accountants who specialize in reviewing financial documents to see if they comply with tax laws, regulations, and other accounting standards. These professionals evaluate organizations' financial documents to make sure that they are accurate and follow legal guidelines.
International accountants focus on working with businesses that operate around the globe. They know about trade laws, foreign currency rates, and the accounting principles of other countries.
Bookkeeping is a tactical financial process that includes recording and organizing financial data. That includes what's being spent and what money the business is making. This work can be done either by an accountant or a bookkeeper. Bookkeepers focus on tracking spend. Accountants go beyond, advising leaders on what to do with this data.
The following is the simplest explanation: An accountant can be a bookkeeper, but not all bookkeepers are accountants.
The Generally Accepted Accounting Principles (GAAP) are a blueprint for accounting across sectors in the U.S. These principles confirm that publicly traded companies share their finances accurately.
By law, accountants for all publicly traded companies must comply with GAAP. Let's break down these principles.
The working accountant is compliant with GAAP rules and regulations.
Why this accounting principle matters: This principle regulates how accounting works as a profession. Without it, every company would manage finances in its own way. This would make it tough to keep business dealings fair.
How to apply this principle: Follow all Financial Accounting Standards Board (FASB) regulations.
This principle states that the accountant has reported all information consistently throughout the reporting process. Under the principle of consistency, accountants must clearly state any changes in financial data on financial statements.
Why this accounting principle matters: It makes sure that you can compare financial reporting across a company. Say you're comparing two departments, but they record the same transactions in different ways. This would make it difficult for stakeholders to compare them.
How to apply this principle: I suggest creating clear processes for recording transactions and events as soon as you start your business. Once you have a set process for documenting and reporting your finances, stick to it.
The accountant provides an accurate financial picture of the company.
Why this accounting principle matters: This is a promise from the accountant that they're not trying to mislead anyone. This helps investors trust that the information your business presents is accurate. It's also a commitment to presenting data in the fairest and most accurate way possible.
How to apply this principle: I recommend maintaining your financial records honestly and accurately.
All financial reporting methods should be consistent across time periods.
Why this accounting principle matters: This is another principle of regularity and consistency. It makes it easier to compare financial records.
How to apply this principle: Clearly organize your daily bookkeeping operations. It's also a good idea to create processes so that your reporting stays consistent over time.
All financial information, both negative and positive, is disclosed accurately. The proper reporting of financial data should be conducted with no expectation of performance compensation.
Why this accounting principle matters: It says that accountants shouldn't alter reporting. Instead, accountants must commit to reporting both good and bad performance.
This sounds straightforward, but accounting can impact both internal and external opinions. Because of this, many publicly traded companies report both GAAP and non-GAAP income. Sometimes, this extra data can help the public image of a company or clarify the value of a company's investments.
How to apply this principle: Similar to the Principle of Sincerity, I suggest creating financial reports that are clear and accurate.
Financial data should be presented based on factual information, not speculation.
Why this accounting principle matters: It makes sure that financial statements are a realistic overview of revenues and liabilities. It reminds companies not to over or understate their financial risk.
How to apply this principle: Business moves fast, and many companies rely on in-progress projects and income to meet goals. But even if this applies to your business, continue to maintain accurate and timely records.
In my opinion, the best way is not to expect profits but to prepare for any possible losses.
This principle states the assumption that the company will continue operations.
Why this accounting principle matters: This is another guide for your reporting timeline. It makes it easier for stakeholders to understand and compare performance because it separates it into short periods of time. It also makes it easier for them to see the most current financial information.
How to apply this principle: Instead of valuing assets on speculative business plans, I believe the best way is to maintain a consistent process for financial reporting and record-keeping.
All accounting entries should be reported during relevant time periods.
Why this accounting principle matters: This is another guide for your reporting timeline. It makes it easier for stakeholders to understand and compare performance because it separates it into short periods of time. It also makes it easier for them to see the most current financial information.
How to apply this principle: Report on your finances annually, quarterly, and monthly. It's also a good idea to set your fiscal year when you start your business.
Accountants should aim to provide full disclosure of all financial and accounting data in financial reports.
Why this accounting principle is important: Your business can decide which transactions are "material" and which are not. Enterprise companies will approach what is and is not "material" differently than a small business would. If something isn't "material," it's something the business feels is too small to mention.
If you limit your accounting to material transactions, you can save time for your business. At the same time, I suggest making sure that financial information that's important to stakeholders is easy to access and review. This concept comes up most often during an audit.
How to apply this principle: You might start your business accounting by recording every transaction. But as your business grows or circumstances change, I would recommend revisiting the way you record and report small transactions.
According to this principle, parties should remain honest in all transactions.
Why this accounting principle is important: This principle establishes trust. It reinforces that you will share important information with stakeholders before you enter into a contract together. This gives each person a full and clear picture of your business before they make an agreement.
How to apply this principle: I think being transparent and sharing essential details as you make agreements is the correct way of maintaining good faith.
Regardless of how you manage your business accounting, it's wise to understand accounting basics. I like to think of it this way: if I can read and prepare these basic documents, I'll understand the business's performance and financial health - and as a result, I'll be able to make better financial decisions for the company.
Here are the basic accounting documents and calculations I recommend picking up, even if you work with a professional consulting agency or have hired a certified public accountant (CPA). They provide valuable snapshots and measures of your business performance.
An income statement shows your company's profitability and tells you how much money your business has made or lost. This allows you to see where your money is coming in.
A balance sheet is a snapshot of the business's financial standing at a single point in time. A balance sheet also shows me the business's retained earnings, which is the amount of profit that has been reinvested in the business (rather than being distributed to shareholders).
Many small business owners do a combination of bookkeeping and accounting.
A profit and loss (P&L) statement is a snapshot of your business's income and expenses during a given time period (like quarterly, monthly, or yearly). This calculation will also be reflected on your business's Schedule C tax document.
A cash flow statement analyzes your business's operating, financing, and investing activities to show how and where you're receiving and spending money. Keeping track of spending and maintaining the business expenses in a detailed and organized fashion allows for deeper looks into the company's spending and helps lower costs in areas that may not need as much attention.
A bank reconciliation compares your cash expenditures with your overall bank statements and helps keep your business records consistent. (This is the process of reconciling your book balance to your bank balance of cash.)
If you run a business on your own, I expect you may do some or all of the following tasks:
Sometimes, a business will do this research and work as part of an initial business plan. However, experience says that it's highly unlikely to plan everything ahead of time. The same applies to accounting. You learn about basic accounting requirements a little bit at a time as the business grows.
Accounting is a complex discipline. But if you're not an accountant yourself, you don't need to know everything about accounting - only the practices and parts that have to do with your financial operations, legal obligations, and business decisions.
My suggestion? Start early. If you're just getting started, consider adding your accounting strategy to your business plan. How do you expect to manage your finances? Will you use accounting software or make an accountant your first hire? You can then adapt your plan as needed.
Pro tip: According to a recent QuickBooks survey, 34% of small business owners do their own bookkeeping. I recommend having a look at this list of accounting software examples such as QuickBooks, Xero, and Warp, if you're looking to select a software for your business. The article also discusses which automation tool is the best to help you analyze data to improve your business.
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Whether you've just launched your business or are a startup veteran, the following section is important. I have discussed eight steps that will introduce you to the accounting process (if you're not yet familiar with it) and set you up to scale your business in a sustainable way.
Note: This is simply an overview of the discipline of accounting. I recommend conducting more research and potentially hiring a professional accountant (which I'll talk about below) to ensure you don't miss any financial or legal obligations.
For your first order of business, decide where to keep your money. This may vary based on your business's legal structure. If your business is an LLC, Partnership, or Corporation, you are required to have a separate business bank account. If you're a Sole Proprietorship, you don't have to - but I still recommend it.
Having a separate bank account for your business income and expenses will make your accounting easier. You'll only have one account to monitor for bookkeeping and tax purposes, and your personal income and expenses won't get entangled with your business ones. Believe me - only having to look at one set of bank statements is a lifesaver during tax season.
Look for a bank that has a local branch as well as robust online banking. Also, be sure the bank can integrate with your point-of-sale (POS) system and other technological needs. Business bank accounts typically charge more than personal accounts and often have a higher minimum balance. Check these numbers before committing to a bank and a business account.
I recommend opening two accounts - one checking account and one savings account, the latter in which you'll stash money for taxes and unforeseen expenses. And remember, before you can open any business accounts, you must have a registered business name.
Finally, consider opening a business credit card. Not only will this help offset some upfront expenses, but it will also contribute to your business's overall credit. Also, Corporations and LLCs are required to have a separate line of credit outside their personal accounts.
Raise your hand if you've heard anyone say, "Hey, I can write that off." I heard my parents say that a lot when I was younger - they're both entrepreneurs - and I had no idea what it meant.
It wasn't until I started my own venture in college that I came to understand tax deductions: they are a wonderful yet pesky benefit of owning a business.
Many business expenses are tax deductions - expenses that deduct from what you owe in taxes. For example, if I spent $500 to fly to and attend a marketing conference, that's $500 less I owe in taxes for that year. The catch? In order to claim a deduction, you need to keep a record of that expense.
Historically, keeping, filing, and reviewing paper receipts was a time-consuming task. (My mom used to pay 10-year-old me to organize receipts by date and highlight the vendor and total amount … now I understand why.)
Today's entrepreneurs have it much easier. Software, apps, and cloud-based bookkeepers have made it a breeze to track expenses and not have to keep hundreds of receipts lying around. Check out solutions like Rydoo, Expensify, Zoho Expense, and Shoeboxed to help manage your expenses.
Now, let's discuss the expenses and supporting documentation you'll be managing. While you can't cover every possible deduction, here are a handful that you should definitely keep a record of. (Why? Because they're easy to mix up with personal expenses … and the IRS knows it.)
In case you need to support these expenses, I recommend that you keep the following documents. (Rule of thumb: When in doubt, keep everything.)
Another common way to manage your expenses is by separating operating expenses from selling, general, and administrative (SG&A) expenses.
Some companies decide to combine operating (OPEX) and SG&A expenses, while some separate them (they can be combined on an income statement). Either option is totally fine - it's about preference.
Here's what you need to know about OPEX versus SG&A expenses:
Ah. If only bookkeeping meant hoarding the paperbacks I overbuy from my local bookstore - I'd be really good at that.
Unfortunately, bookkeeping isn't always as fun. It's another important account term that refers to the day-to-day recording, categorizing, and reconciling of transactions. Basically, bookkeeping keeps you from spending and making money without tracking it.
Bookkeeping is an ongoing task. Technically, you should be doing it every day, but we all know life can get in the way. Ideally, you should complete your bookkeeping every month so you can keep a thumb on the pulse of your income, expenses, and overall business performance.
Before I dive into how to do your bookkeeping, let's cover the two main bookkeeping methods.
The cash method recognizes revenue and expenses on the day they're actually received or paid. This method is the simplest for small businesses because it doesn't require you to track payables or receivables and reflects whether or not your money is actually in your account.
The accrual method recognizes revenue and expenses on the day the transaction takes place, regardless of whether or not it's been received or paid. This method is more commonly used as it more accurately depicts the performance of a business over time.
The only thing it doesn't show is cash flow - a business can look profitable but have zero dollars in the bank. If a business's annual revenue exceeds $5 million, it's required to use the accrual method.
Now, I'll talk about how you can do your bookkeeping.
Do you plan on hiring employees or contractors? Perhaps you're managing on your own for now but are considering expanding in the future. Regardless, you'll need to understand and secure a payroll system.
Payroll is another tedious yet required part of accounting. Thankfully, there's plenty of software that can help you. (Hallelujah for modern-day technology, right? ) Check out solutions like Gusto, Zenefits, and Intuit QuickBooks Payroll.
Employees and independent contractors are classified differently and give your business different tax deductions. Here's how to handle both.
You can deduct employee wages (salaries and commission bonuses), employee education expenses, and employee benefits (accident and health plans, adoption assistance, life insurance, and more) from your taxes.
You can also deduct payroll taxes, which are employment taxes paid on behalf of your employees (like Social Security and Medicare, as well as federal and state unemployment taxes).
Employees should submit a W-4 form, so you know how much tax to withhold. In exchange, you should provide employees with a W-2 form, which summarizes their yearly gross pay. They use this to pay personal taxes.
Independent contractors include freelancers, consultants, and other outsourced experts who aren't formally employed by your business. With contractors, you don't pay benefits or withhold taxes on their behalf.
Because of that, contractors should submit a W-9 form, so you have their business information (such as their SSN or EIN), and you should provide a 1099-MISC form in exchange (if you pay them more than $600 per year).
A 1099 form tells the government how much you spent for their services - so you can write this amount on your tax return, and so they can assume the tax burden on their return.
I've talked about your method of paying employees and contractors. Now, let's talk about how you'll receive money for your goods and services. (This sounds like more fun, huh?)
Your method of collecting money is often referred to as your payment gateway. Whether you provide freelance services, set up shop at a local farmer's market, or run a global e-commerce business, you need an easy (and legal) way to collect what you've earned.
Depending on the nature of your business, how you collect money will vary. Let's go over some options.
As a freelance writer, I rarely work with clients in person. In fact, I've only ever officially met one of my clients - the rest I work with purely over email. Because of that, I collect most of my payments through an online gateway.
PayPal is a popular choice for collecting payments. You can also use software like Wave, Xero, or Bench. Not only can you invoice clients through these programs, but you can also conduct bookkeeping, payroll, and other accounting tasks. These charge fees, though, so consider that when making your decision.
Another way to collect payment is through mobile applications like Venmo or Cash App - just be sure to send an invoice as proof of payment. My least favorite option is collecting payment via check - the reason being that it takes longer than an online transfer. (Send an invoice with this method, too.)
Collecting money in person (at a storefront, marketplace, etc.) can get pricey. Between equipment, credit card fees, and handling physical cash, it can be a hassle. Thankfully, Square and PayPal make it easy to accept card payments using your smartphone or tablet. These programs also send your customers' receipts, reconcile your transactions, and handle returns if necessary.
If you expect a high influx of daily purchases, I recommend choosing a more robust POS system and more reliable equipment (like a register and dedicated card reader).
Both Square and PayPal offer this option, too. With this option, you'll need to set up a merchant account with your bank. (This account acts as a middle ground between your POS system and main bank account.)
Ecommerce platforms like Shopify, BigCommerce, and WooCommerce often provide built-in payment gateways. These are always the easiest to adopt as they're already integrated with your website. I suggest also checking out third-party payment solutions such as Stripe.
Taxes are inescapable. Thankfully, they're easy to prepare for. I believe the best way to prepare is to educate yourself on your business's tax obligations, keep accurate records, and set aside revenue (or pay ahead in quarterly taxes).
Paying taxes as a small business is slightly more complicated than it is as an individual. The amount and type of taxes you file will depend on a few things: your business's legal structure, if you have employees (and how many), and if you collect sales tax.
This part of accounting - tax obligation and collection - is particularly tedious. I highly recommend that you work with a professional to at least ensure your business is following the proper procedures and laws.
Similar to other processes and strategies across your business, I'm of the opinion that constantly reviewing and evaluating your accounting methods is also essential. You should always have a controlled process in place for your business accounting - because, as I've mentioned throughout the above sections, it's an absolutely critical aspect of a company's overall health.
The frequency with which you review and evaluate your methods is bound to be unique to your specific business. I recommend auditing your process at the end of every month, quarter, and year. This way, nothing slips through the cracks or becomes a problem that's too large to bounce back from.
If the nature of your business is seasonal, tailor different factors, like the frequency of your evaluation, to this cycle. For instance, you might require more reviews of your accounting process during high season and fewer during slower months.
As important as it is to understand how business accounting works, you don't have to do it alone. That's where professional accounting services and CPAs come in.
If your budget allows, I highly recommend hiring a professional to help with your accounting. Here's how to go about doing so:
Whomever you choose, be sure to read plenty of reviews and testimonials about your potential accountant. Inquire about their experience in your industry, rates, and services, and make sure you're comfortable with how and how often you'll communicate with your accountant before you sign anything. I like to set all the expectations upfront.
Also, if you have the funds, hiring an in-house accountant is my recommended option. This way the responsibility for maintaining your business's accounting is off your shoulders.
Being a rockstar accountant is more than just being good with numbers. One needs a vast array of knowledge on tax codes, financial regulations, and the best practices for maintaining a healthy balance sheet. In my opinion, you also need to have the soft skills to apply your knowledge to the real world - here are some of them.
If you're on the prowl for an accountant, you want to find one that listens. I believe a good accountant is one who understands what your business does, the expenses required for you to operate, and any financial challenges you might have on your radar.
If you are an accountant or an aspiring accountant, develop the skill of providing a listening ear. You can better apply your knowledge if you have a clear understanding of a client's needs.
Similar to any other profession, time management is an essential skill to have. An accountant is often faced with internal deadlines and audits. Plus, reviews of your financial health need to be completed in a timely way.
If you're an accountant, remember many of your clients will have the same deadlines. Tax day and the financial year are big markers for the organizations you work with. I suggest making sure you can manage your book of business so no one's needs fall through the cracks.
As an accountant, you need to be able to offer timely suggestions and recommendations to your clients. I'm of the view that organizational skills need to be top-notch. Keep track of where information is for all of your different clients. That should include secure storage systems for all of their documents.
As an accountant, you're dealing with sensitive information. You should have safe channels for transferring these documents so the data is safe from bad actors.
I also rate the ability to think on your feet as an invaluable skill. There may be a lapse in the monthly revenue or a payout that is too high for employees. You'll be expected to analyze information, keep track of the story your money tells and provide guidance on what to do next. No matter the case, I consider critical thinking as essential.
While math skills are helpful, data and systems analysis are keys to success in this role. An accountant is often an investigator. This means that curiosity and deductive reasoning skills are also useful.
Understanding these skills can also assist business owners. If you have these abilities, you may be able to do a lot of your accounting yourself. If you need outside help, knowing these skills will help you choose a valuable business partner.
Learning to manage finances, whether in a personal or business context, is an incomparable skill. Simply put, learning accounting is understanding how to manage financial transactions. At first, learning it might seem like a daunting mountain to climb, but it's a journey well worth it.
I believe once you learn this skill, you'll be able to see the entire picture of your company. You influence important business and financial decisions. You understand your company's tax obligations. You also get better at calculations.
Learning the discipline of accounting is a skill. If you plan to use accounting software, knowing the basics will enhance your intuition and enable you to navigate the tools more effectively. Even if you opt to hire a professional, you'll be able to better communicate if you understand the concepts that I've discussed in this guide to accounting basics.
Editor's note: This post was originally published in May 2019 and has been updated for comprehensiveness.
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