subject: One More Reason To Have Proper Accounting [print this page] All businesses use accounting in their financial system. Using a simple check and balance can do wonders on any business, be it sole proprietorship or a corporation. There are many accounting professionals that you can hire to do the work for you especially when tax season comes.
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 feel hiring an accountant would be a bit too much since you are just starting, then it's time for you to familiarize yourself with accounting for your own use. Accounting will give you a good grasp of the flow of financial information within your business. And in the process, it will help you make sound decisions in relation to 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 tedious 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.
