Accounting Basics For Small Business Owners

Of all the aspects of running a small business, accounting is one that is usually not well understood. With the wide range of options, tax regulations, and reporting standards, this area is its own field of expertise for a reason. Most small business owners hire bookkeepers and accountants (and rightly so) to manage this part of the business—but there are some basics a business owner still needs to understand.

Regardless of your level of involvement with day-to-day accounting tasks, familiarize yourself with what your accountant or bookkeeper is doing. For example, you won’t necessarily need to know the ins and outs of every regulation so much as understanding the end result of these regulations. This enables you to better manage your relationship with these advisors, and to make more efficient use of data and reports they prepare when you make decisions and plan the next steps for your business.

Basic principles

Accounting generally encompasses a range of topics such as interpreting financial data, providing advice based on this data, and creating reports based on your financial data. These reports are not only used for internal decision-making processes, but often are externally reported to third parties, as well.

No report or advice is going to be any more accurate than your data. This is a key reason why many businesses integrate accounting software with the rest of their software to ensure that whoever is reconciling accounts and generating reports has the most up-to-date and accurate data. Once the reports have been generated, they will provide you with the information you need to not only understand your business health, but properly consider future decisions and actions.

General ledger

Your general ledger is the primary record of revenues and expenses. This will include every financial transaction, whether revenue or expense. Your other important documents, such as balance sheets or profit-and-loss statements, are based on this primary, central document. The tasks done by your bookkeeper or accountant will be feeding information to your ledger and extracting data as needed.

Using financial reports

When you are making decisions, your financial reports can give you both big- and small-picture views so that you can best manage your decisions and accounts. Some key reports are:

  • Cash account report: This type of report will tell you what you actually have on hand in liquid assets. If you are thinking about selling a new product, this report can tell you what you have available in cash to carry the new inventory.

  • Sales tax reports: Your tax reports will list what you owe for sales taxes, as well as how much you have collected, to ensure that you will be able to pay the tax bill in full when due.

  • Inventory value/costs: These reports can be used with revenue and sales reports to help determine if your margins are sufficient and if you’re tying up too many resources in high-cost, slow-selling products.

What needs to be tracked?

In a word, everything. When determining the value or health of your company, it’s essential to know your assets, liabilities, and margins. Accounting practices will be able to figure out these values based on your transaction history. For example, your inventory levels are tracked not only in regard to number of units per product, but the total value of the inventory you have on hand. If you have depreciating assets, accounting processes will address the adjustments as needed.

Instead of trying to learn every aspect of accounting, focus on the details you base your decisions on, and those that will actually help you understand your business.