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Introduction to Accounting

Guest post by: Mash Bonigala

Article Overview: As a small business owner I have very little extra money available for extras. For me this includes a highly qualified accountant. Fortunately, for most small businesses hiring an accountant is not necessary. All small business owners should know the basics of accounting so that they can keep accurate records. When every penny counts then every penny should be counted. In essence this the definition of accounting. So, what does every small business owner need to know about accounting?

Introduction to Accounting

As a small business owner I have very little extra money available for extras. For me this includes a highly qualified accountant. Fortunately, for most small businesses hiring an accountant is not necessary. All small business owners should know the basics of accounting so that they can keep accurate records. When every penny counts then every penny should be counted. In essence this the definition of accounting. So, what does every small business owner need to know about accounting?

What is Accounting?

Accounting can be described as how a business “keeps score.” It is how you know if your business is succeeding or failing. By knowing your bottom line you can easily make informed business decisions. Business accounting is just like balancing your check book, or looking at your personal bank statement to give you an idea of where your personal finances stand. By the end of the process you will not only know if your business is making money, but where and how your business is making and losing cash.

Financial Statements

Financial statements are the reports accounting produces. They should be easily read and understood by anyone that looks at them. When you apply for a loan, meet with your shareholders, or have a discussion with potential investors these reports become essential tools. Even if you use the services of an accountant you should still know what the reports they produce mean. The basis of have accurate financial statements are keeping perfect records. The easiest way of doing this is by keeping a general ledger. This should include every source of income and every expenditure, no matter how small. All of the information in this ledger should fall into one of four categories: money coming in, money going out, money owed to the business, money the business owes to others. This general ledger can then be analyzed to produce the three pieces to a basic financial statement. These pieces are comprised of the balance sheet, the income statement, and the cash flow statement.

In part two of this article I will go into more detail on what these three statements entail and how to put them together. In the simplest terms, a balance sheet gives information on the items your business has and who owns that stuff. The income statement details all the income coming into the business during the financial period and all of the expenses going out of the business. At the end of the income statement you will have a positive or negative number that lets you know if your business has been profitable during that period. Finally the cash flow statement provides detail on the actually cash that has moved in and out of the business during the financial period. Unlike an income statement you can never have a negative cash flow statement. By compiling the information contained in a financial statement you will be able to determine not only if your business is profitable but where you are losing or gaining money. This information can be used to improve your business in the long and short term but only if you are able to understand and read the statements proficiently.

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Article Tags: accurate records, basics of accounting, extra money, introduction to accounting, qualified accountant, small business owner, small business owners, small businesses



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