Why Accounting Is Crucial To Your Business's Growth
Accounting is in every financial system of every business
. Putting simple checks to maintain balance within the business will go a long way for any entity be it a simple sole proprietorship or a more complex corporation. For your taxation needs, there are many accounting professionals whose specialty is just that who you can hire to look out for you your tax related concerns.
Doing your own accounting for your business can be great. Aside from keeping track of your expenses and savings, you have control over everything in your business. Imagine the time and money you can save by keeping your files and accounts in order.
If you aren't sure about hiring an accountant or if you think it's unnecessary since you still have a small operation going, you can use simple accounting for your business. What accounting does is give you useful information about where the finances are going within the business. Accounting helps you make better decisions in handling your operations.
The catch in wanting to use accounting is that it has its own unique world. Everyone who wants to use accounting needs to learn its unique language for it to be useful. Accounting uses the double entry bookkeeping. This basically means that for every debit you record, there is a corresponding credit effect for that. In application, whenever you debit an asset to record an increase in the resources you have, you should have a corresponding credit, like foregoing of cash in payment of that acquired asset; and so forth. And in the end, all these debits and credits are added up and should be balanced.
In starting with your simple accounting system, you must have your books. This is your start in bookkeeping. The accounting books are records where you write down all your transaction information which will later on be processed into useful reports. The raw data are recorded. And every end of a certain period, these information are collated and processed into meaningful reports. The reports are used for evaluation of the business and decision making purposes. Accounting books are just simple records, could come in a form of notebooks. What makes it an accounting book is the format: the lines and columns designed to record specific business information.
Now that you've got your "book", its time to learn about the three basic elements of accounting:
1. Assets - these are things of value owned by your business. Examples are cash (from sales), accounts receivables, inventory, land, building, and equipment.
2. Liabilities - these are debts of your business to other people, businesses or financial institutions like banks or lending companies. The system recognizes these accounts with words followed by "payable" like accounts payable and loans payable. This also includes taxes and insurance payments.
3. Owner's Equity - this is the amount the business owner is entitled to receive of whatever is left of the assets after the liabilities have been taken. It is sometimes called net assets.
All three elements form the accounting equation:
Assets = Liabilities + Owner's equity
And since the equation must always be balanced, in the end of the books the amount of the assets should be equal to the owner's equity. If you cannot balance it, you must have missed something or your business assets are being funneled to the wrong account.
If this accounting work sounds too cumbersome for you, you can buy software that can do the record keeping of your business. Some offer the full accounting service in their programs, from trial balances to printing financial statements. However, you still have to manually type in the accounts on your computer. If you do have a basic knowledge of accounting, your program can still give you the wrong information.
Accounting is a necessary tool for any business. The more you understand about how it works, the better it can help you improve your business.
by: Jeff Jackson
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