subject: Taking Full Control Of One's Business [print this page] All businesses regardless of size and shape, use accounting for their financial system. Maintaining a simple check and balance system will go a long way in helping your business.
Managing the accounting aspect of your business can be fun once you start appreciating the challenges that go along with it as well as the benefits derived from the exercise. Good accounting will help you be on top of things on your business.
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 for 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.
