Accounting Basics
Money can make or break your business—after all, the goal of any business is to successfully turn a profit. As a small business owner, you have a critical role to play in your company’s financial success, so by learning how to read and manage your financials, you can make informed decisions and smart investments to guide your business to greater profits and growth. Take a look at our introduction to small business accounting below.
Choosing the Right Tools
Many small business owners starting up for the first time assume that investing in professional financial assistance is a surefire way to keep afloat. However, it’s important to remember that professional accountants and bookkeepers are tools that should make your business more efficient, not replace your need for obtaining financial understanding. If you’ve never dealt with accounting, consider investing in additional learning resources and becoming knowledgeable in these essential areas.
Depending on your own personal learning needs, you may be able to find just what you need from online tutorials or from one of the many publications on small business accounting at your local library. However, if you’re starting a business for the first time, nothing is more valuable relevant coursework. The basic accounting courses at your local community college or adult education center should be enough to get you started.
Accounting Methods
There are two common methods for conducting small business accounting. You can determine the best one for you by considering your business plan, your projected annual earnings and accepted forms of payment.
- Cash Basis. Cash basis is the simplest form of accounting because it recognizes your revenues and expenses in real time. This means that when money is spent for any reason, or money is earned for any reason, the gain or loss is recognized as soon as the cash trades hands. It’s the best method to employ if you’re starting out small—as long as you don’t keep inventory, and your business does not sell on credit or offer other payment delays.
- Accrual Basis. If your annual income is going to go over $5 million, or if you’re planning on keeping inventory of your product, you have to use the accrual method—it’s the law. However, unless you’re starting out big, you only need to consider the accrual method if you operate with or accept delayed forms of payment like credit cards and checks. That’s because accrual basis accounting recognizes revenue and expense before you actually send or receive payment.
This information is only the tip of the iceberg when it comes to best accounting practices for small businesses. We encourage you to continue your research in order to expand your knowledge even further. In the meantime, check out our Cash Management Basics page if you’d like to discover more essentials for organizing a small business.
