Small Business Accounting: Basics Every Business Owner Should Know
What is accounting?
Accounting for small businesses is the documentation, monitoring, and evaluation of a business’s financial health. It involves recording all money in and out of a company in the form of expenses and revenue. Proper accounting can help a business navigate tax season, growth opportunities, and external and internal factors that can affect business profitability.
The Difference between Accounting and Bookkeeping.
Accounting is used as an all-encompassing term to refer to the overall financial management of your small business. However, if you need to hire a bookkeeper or accountant, it’s important to understand the difference between the two so you can get the help you need.
Bookkeeping is the recording and organizing of financial transactions, including income and expenses, in a structured manner. It involves the day-to-day tasks of recording financial data in ledgers or accounting software. The goal of bookkeeping is for the accountant or business owner to have accurate information to determine the financial health of the business.
Accounting goes beyond bookkeeping and interprets, analyzes and summarizes financial data provided by the bookkeeping system. This includes more in-depth financial analysis and reporting, developing budgets and making strategic decisions based on data. The goal of accounting is to provide insights into the financial health of a business to drive business decisions.
Important Accounting to Know
When you start learning about small business accounting, there is a fair amount of new terminology. These ten terms are a starting point for understanding the finances that drive your business.
Revenue
The total revenue generated by your business from sales or services provided to customers or clients.
Expense
Expenses incurred by your business such as rent, utilities, subscriptions, supplies, and salaries.
Profit
Total Revenue – Total Expenses = Profit. This is what is left over after covering all the costs of running your business.
Assets
Valuable resources that belong to your business. This includes cash, inventory, equipment and accounts receivable.
Liabilities
Debts or obligations your business owes to others. Including loans, credit, accounts payable and other expenses.
Equity
Also referred to as owner’s equity or shareholders’ equity. Represents the owner’s claim to the assets of the business. You can calculate your equity: Assets – Liabilities = Equity. This is basically the net worth of your business.
Income Statement
Also referred to as profit and loss statement. It shows your business’s revenue, expenses, and net profit or loss over a period of time. (usually a month, quarter or year)
Balance Sheet
A balance sheet gives you a snapshot of your financial position at a particular point in time. It lists assets, liabilities and equity to show the overall health of your business.
Cash Flow
It’s the movement of money in and out of your business. If it’s positive, more money is coming in than you’re going out. If it’s negative, you’re paying more than you’re earning.
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