For most small businesses, your accounting needs are relatively simple. However, for most business owners accounting often is the least favorite part of a business.
So, we are going to break down accounting to the bare essentials, so you can understand it and why it’s essential for your business.
Accounting is basically 3 things –what you own, what you owe, and the difference between the two is what the business is worth.
The Balance Sheet
Breaks down your business assets, liabilities, and owner’s equity at a specific point in time – also known as the statement of financial position.
These accounts are tracked:
- Assets – what your business owns. Cash (bank accounts), money owed to you, company car, equipment purchased, etc
- Liabilities – what your business owes. Money due to vendors, taxes, credit cards, loans, etc.
- Equity – the difference of Assets and Liabilities — what the business is worth. Equity consists of retained earnings (accumulation of money received and money spent since the inception of the business) and owner’s equity (business assets plus its liabilities).
Assets = Liabilities + Equity
Profit and Loss Statement
A summary of income and expenses for your business. The P&L will inform you whether your business made or lost money for a specific time period – also known as Profit and Loss or Income Statement.
These types of accounts are tracked:
- Income/Revenue – money received from sales
- Cost of Goods Sold – money spent to purchase or manufacture YOUR OWN PRODUCTS
- Expenses – money spent to make sales and run the business
Net Income = Revenue – Expenses
Sales – COGS = Gross Profit – expenses = Net Profit
Accounting Software
Everything you do in business affects these 6 types of accounts.
It actually affects two of the six in every transaction. This is double entry accounting. Double entry doesn’t mean you have to enter everything twice – it simply means that every financial transaction has equal and opposite effects in at least two different accounts. Debit must equal credits.
Luckily, Accounting software – such as QuickBooks – takes care of the double entry and the debits equaling credits!
Why is Accounting Important
The next question is, why is this important to you and your business? Simple – you need to know if you are making money or losing money and why. And, is your business worth more than what you owe to others.
The answers to these questions are on the Financial Statements – Profit and Loss Statement and the Balance Sheet
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