Accounting Basics for Your Small Business

Whether it’s a small business or an extensively developed business accounting is very crucial for everyone.

Most people think that accounting has nothing to do with small businesses but it’s not true at all.

In order to run companies and organizations, business accounting is mostly used.

The practice of business accounting involves recording, analyzing, and reporting your business’s financial status and performance.

Keeping good bookkeeping and accounting practices is essential to knowing your business’s financial status, staying compliant with the law, and making informed business decisions.

The accounting basics you need to know will help you succeed in your business, even if you’re not a certified public accountant (CPA).

Best Accounting Method For A Small Business:

Cash accounting is commonly used by small businesses due to its simplicity.

Businesses generally use the accrual method with inventory for sale to customers.

Cash sales and purchases are allowed for small businesses with gross receipts under $25 million.

The accrual method is a more tedious way of accounting, so software programs are available to assist those who opt for or are required to use it.

Not just the software but there are many online services like 1099accountant that provide great accounting, bookkeeping, and many great services.

Basic Accounting Terms:

These are some basic terms that small businesses need to understand properly. 

Accounts Receivable:

A receivable is money that your business owes for the provision of services or goods. On the balance sheet, they are reflected as assets. 

Accounts Payable:

It is a liability on your balance sheet and it is the money your business owes.

Assets:

Assets are all those things that your business owns and it has monetary value.

Assets are tangible and intangible. The tangible like land, cash, and equipment, and the intangible like patents and stocks. 

Break-Even Point:

The break-even point for a business occurs when total costs equal total revenues. In this situation, there is no loss or no profit. 

Capital:

The assets that provide ongoing service to your business are known as capital. Capital can be your brand’s name, cash, software, or facilities.

Clash

The money that goes in and out of your business is known as cash flow. 

Credit:

Anything that flows out from your business is known as credit. The expense account or asset can be decreased and the equity account or liability can be increased. 

Debit:

Debits are the exact opposite of credit means anything that flows into your business is known as debit. The expense account or assets will be increased and the equity account or liability will be decreased. 

There are many more but we only discussed very few of them. 

Methods of Accounting:

There are primarily 2 methods of accounting that are cash accounting and accrual accounting. 

Accrual Accounting:

The accrual method of accounting records and recognizes transactions once the sale is complete, regardless of whether you have been paid.

At the time of the transaction, accrual accounting provides a very authentic and accurate representation of the business’s true profit.

It does all of this by keeping a record of revenues and expenses. Accrual accounting is the most common type of accounting.

You may also be able to reduce your tax burden using this method. Some expenses can be deducted before they are actually paid since they are accounted for when they are realized.

Cash Accounting:

Once you receive payment, you record transactions according to the cash accounting method.

Compared to accrual accounting, cash accounting is more straightforward.

Your business can see how much cash it has available at any given time. In cash accounting, future estimates are not used. 

Wrapping It All Up!

Small business requires accounting too. I hope our article helped you in understanding the accounting basics for your small business.

We tried to cover all the important basics in this article for you. 

Let us know in the comment section if you find this article helpful.